Friday, February 01, 2013

Why Stimulus Fails

Just how much do we need, anyway?
Can it really be that adding $125 billion a year would have solved all of our economic woes? The US government has consistently gone over its projections by at least that amount several times over the last four years, and yet we are not better.

So I'm not sure I understand the counterfactual. Is it that without the $900 billion worth of stimulus that we did, plus a few later add-ons, per-capita income would now be just north of $36,000 a year? That's a Great-Depression-sized decline, without the catastrophic banking errors.

Either stimulus displays declining returns to scale, or I think we're talking about a much larger number having been needed--something closer to $1 trillion. Maybe something a lot higher than $1 trillion. After all, the output gap is an annual event; it's not something that just happens once. It's possible that we might have to spend $600 billion or $1 trillion a year, for years at a time, in order to close that cursed output gap.

Or is it that we did the stimulus too slowly--did we need it all at once, along with another $600 billion or so?

Either way, was such a thing feasible?
Theory is one thing; reality is another...

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