American Recovery and Reinvestment Act -- Sufficient Stimulus?
• How much of this economic activity from the relevant spending and tax cuts will actually take place this year and early next year in time to speed-up the recovery, which will eventually happen anyway?
• Will there be a “multiplier” impact of this spending, if any? In an economy with a lot of slack, Davis notes the extra resources from the “stimulus” may be otherwise idle and the multiplier may actually be greater than one. He says that some politicians and analysts project a multiplier of up to 1.5 for ARRA—which he feels is an unlikely number. In a “full employment” economy, the net impact would be zero since the resources would be otherwise employed.
In today’s economy and for the short run, Davis estimates an in-between multiplier of considerably less than one but greater than zero.
• The psychological factor of consumers and investors believing something positive has been accomplished, and returning to more normal behavior.
“My educated guess is that the package may add around 0.5 percent to GDP in the second half of this year and the first half of next year, or about $75 billion over the 12 months from mid-2009 to mid-2010,” Davis remarks. “My numbers are more conservative than the Congressional Budget Office estimates (and much more conservative than the President’s advisors), but I believe they are overestimating both the multiplier impact and speed of the spending.
“The longer term net impact beyond 2010 will most likely be negative as the higher proportion of ‘temporary’ government spending and increased debt becomes permanent, and acts as an anchor on the economy.” PI