Unemployment Watch: 09-08-09

In May, the first time that I saw this graph, Greg Mankiw had an excellent post on his interpretation of these projections (link here). He proposed two reasons for the divergence: 1. the Stimulus has not enjoyed its desired effect or 2. the baseline projections used in the forecasts were too rosy.

I agree wholeheartedly with the latter, but the conclusion on the former is more of a mixed bag.

The grievance I have with the Stimulus is the timeline of the expenditure of the funds, which reminds me of a chi-distribution: proportionally less investment in the beginning (now, when we need it) with more following and eventually dissipating. To date, Recovery.gov reports that $88.8 of the $787 billion has been "paid out" (reference). Even with this likely inflated figure, it means that just 11% has been spent in the depths of the crisis. The consensus seems to be (from my reading and checked by the markets at http://www.intrade.com/) that GDP numbers will be positive in Q3 and Q4 of 09 on into Q1 of 2010. The Stimulus, then, will provide a boost to aggregate demand when it is less necessary; thus creating a lagged Keynesian fiscal expansion.

IF there is even a fiscal multiplier to speak of. A very big if. Volker Wieland (Vox) says there is none. This new working paper from the IMF which concludes that fiscally expansionary shocks are most effective when there is a (believable) commitment by the government to reduce expenditures in the medium term. And on the other side you have Christy Romer, whose paper came out in mid-January 2009, concluded the fiscal multiplier was approximately 3, and has since become a punching bag for stimulus detractors. (I even read it called a piece of "shlock economics").

My own opinion from the literature (which I buffed up on towards the end of grad school) is that the fiscal multiplier is between -0.5 and 1. That puts it in the realm of the opposite of its desired effect to effectively neutral. Stimulus, then, was perhaps not the best use of our national resources.

Time will provide the answer as to how much of a boost the bill provided, but I don't think it will be as positive as the Democrats who pushed it through would have you believe.

JDW