Robert Barro is unimpressed with the fiscal stimulus. He says an extra $600 billion of public spending at the cost of $900 billion in private spending was not a good deal.
The path of incremental government outlays over the five
years in billions of dollars is +300, +300, 0, 0, 0, which adds up to
+600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding
up to minus 300. GDP falls overall because the famous “balanced-budget
multiplier”–the response of GDP when government spending and taxes rise
together–is negative. This result accords with the familiar pattern
whereby countries with larger public sectors tend to grow slower over
the long term.The projected effect on other parts of GDP (consumer expenditure,
private investment, net exports) is minus 180, minus 120, +60, minus
330, minus 330, which adds up to minus 900. Thus, viewed over five
years, the fiscal stimulus package is a way to get an extra $600
billion of public spending at the cost of $900 billion in private
expenditure. This is a bad deal.
See Gary Burtless’s response on National Journal’s economic experts blog.
I am puzzled by his Wall Street Journal analysis, which
seems to treat the stimulus package as though it consists solely of an
increase in government spending. In fact, at least 45% of the stimulus
in 2009 and 2010 consists of tax reductions rather than spending
increases. Moreover, as I have argued elsewhere, the part of the
stimulus package that has provided fiscal relief to state governments
has resulted in reductions in state taxes below where they would have
been without the stimulus Thus, more than half of the stimulus package
consists of tax reductions rather than government spending increases.
It is very hard for me to believe that these tax reductions have failed
to spur an increase in household consumption, contrary to Barro’s
apparent view that personal consumption has declined as a result of the
stimulus.
