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City of Brass

City of Brass

CBO says stimulus will work

The nonpartisan Congressional Budget Office has analyzed President Obama’s economic stimulus plan and concluded that it will have a definite positive impact in the short term, though with diminishing returns:

In an analysis of the $900 billion version of the stimulus bill
currently being debated in the Senate, the nonpartisan Congressional
Budget Office says that the bill could meet President Obama’s goals for
job creation and increase GDP–at least in the short term.

But by the end of 2011, the total number of jobs created would be
half of what it was in 2010. And by 2019, the bill could actually
reduce GDP, although by only 0.1 to 0.3 percent.

The letter,
sent yesterday to Sen. Judd Gregg and copied to eight other leading
legislators, estimates that the bill would stimulate the economy the
most in 2010. By the end of that year, the analysis estimates, 1.3 to
3.9 million jobs would be created. The unemployment rate would be 0.7
to 2.1 percentage points lower than the 8.7 percent forecasted. And GDP
would increase from 1.2 to 3.6 percentage points over a baseline
forecast.

But after another year, CBO estimates, the bill’s effects would
diminish. GDP would be 0.4 to 1.2 percentage points higher than
otherwise, 0.6 to 1.9 million more jobs would be available, and
unemployment would be lower by 0.3 to 1 percentage points. And in 2019,
thanks to the national debt, the GDP could actually be slightly lower
than if the government had done nothing.

Compared with the House bill,
therefore, the Senate bill would stimulate the economy faster, CBO
director Douglas Elmendorf writes in the letter. But its impact would
also be more diminished by 2011. The differences stem mainly from three
of the Senate’s additions: A $70 billion provision to spare about 24
million taxpayers from the alternative minimum tax, a $20 billion
expansion in funding to states, and a decrease in withholding from the
“Making Work Pay” credit.

This is basically the point of the stimulus – to provide a short-term boost to the economy. This stimulus package is heavily weighted towards immediate effect by design; later stimulus packages will provide for more long-term benefits (for example, major infrastructure projects like the smart energy grid, roads and (especially!) public transport all will take years to get off the ground from planning stages to implementation).

The “loyal” opposition insists that the stimulus is going to make things worse – for example, the Washington Times is trumpeting the CBO report as evidence that the stimulus will do active harm. However the truth is that this stimulus is just phase one of the long term recovery that we needed.

Here’s the text of the letter sent to Sen. Gregg from the CBO’s own website.

UPDATE: The Director of the CBO has a blog, where he explains:

The negative effect of crowding out could be offset somewhat by a
positive long-term effect on the economy of some provisions–such as
funding for infrastructure spending, education programs, and investment
incentives, which might increase economic output in the long run.

which is exactly what i said above – longer-term spending on things like infrastructure will balance out the (very slight) decrease in GDP over the long run

  • New Age Cowboy

    Besides what the CBO is reporting, I find it interesting that the trillion we’ve spent on the Iraq invasion and occupation doesn’t phase conservatives at all.

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