More Action Is Needed

The following comes from the July 6 Beat the Press blog written by Dean Baker:

The Timing of the Stimulus’ Impact

The economists who missed the housing bubble seem to be having a hard time understanding the timing of the stimulus. While the vast majority of the money has not yet been spent, the economy has already felt the bulk of its impact.

The reason is simply, more than 60 percent of the stimulus takes the form of lower tax rates and higher benefit levels for programs like unemployment insurance. The lower tax rates and higher benefit levels already went effect at the start of the spring. This means that people already have higher take-home pay or government benefit checks. The stimulus will not increase further in future months, which means that there is no reason to expect spending to increase further.

More than a quarter of the remaining stimulus is devoted to state and local government stabilization funds. This spending will limit the cutbacks at the state and local level, but will not lead to additional growth. The remaining funds are projected to be spent out at an $80 billion annual rate over the course of 2010.

Even if we assume that we are starting from zero spending at the moment, this is boost of just over 0.5 percent of GDP. By contrast, the collapse of housing construction trimmed $450 billion or 3.0 percentage points of GDP from annual demand. The decline in consumption due to the loss of bubble wealth is in the range of $600 billion to $800 billion a year.

In other words, the remaining stimulus is an order of magnitude too small to give much of a boost to the economy. Economists who know arithmetic would be aware of this fact.

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