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Monday, January 18, 2010

Whither the multiplier effect?

This CBO report on employment and the potential need for future fiscal stimulus from Washington has a fascinating picture in one of the sidebars:

To the layman, the CBO has tried to estimate the impact of the American Recovery and Reinvestment Act (otherwise known as the stimulus package or the porkulous package). What they have provided in the picture above is a high and a low end of the estimates of the net impact of the plan on real GDP (net of crowding out effects and other negative impacts of government spending on the private sector).

I am skeptical of the high-end estimates, and therefore would lean towards the low-end as being the more likely to occur, and even then the estimate is likely to be optimistic because CBO cannot take into account all of the unintended consequences of the ARRA.

The upshot is that the impact of ARRA is not very dramatic - about the size of the Houston and Miami economies combined. By 2013, the net impact of the ARRA is perhaps negative!!

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