man you sure do a good job of making the government sound like a ponzy scheme.

borrow all the money to spend, cuz otherwise we don't grow! but the question is who are the suckers at the bottom of the scheme?

oh wait, ya, its future taxpayers.

So we're supposed to believe that $1 trillion in stimuli didn't improve gdp growth at all yet a mere $65 billion in austerity is supposed to shave 1% from gdp? That's awfully asymmetric.

@Fundy

You definitely shouldn't believe anyone telling you that $1 trillion in stimulus funds didn't improve GDP growth. It very, very much did. No asymmetry there.

Again, per the explanation, it seems pretty reasonable.

Fundy, where did you get the first half of your formula? Who said the stimulus didn't add to GDP growth?

That said, and while I know I am no Goldman Sachs genius, that does sound like an impressive multiplier. I wonder if they factored in a reduction in domestic investment by people watching congress do fiscal policy the way a bear cub makes porcelain teacups.

Doug, see John Taylor's paper "The 2009 Stimulus Package: Two Years Later" at http://media.hoover.org/sites/default/files/documents/2009-Stimulus-two-...

Here is the intro:

"My empirical research during the past two years shows that ARRA did not have a significant impact in stimulating the economy.1 I do not think this finding should come as a surprise. Earlier research on the discretionary countercyclical Economic Stimulus Act of 2008—
enacted three years ago this week—indicates that it too did little to stimulate the economy. Research on the discretionary countercyclical actions in the late 1960s and 1970s—the most recent period of such large interventions prior to this past decade—also shows disappointing results, including high unemployment, high inflation, high interest rates, and frequent recessions; the poor results of the 1970s policies led top macroeconomists to write influential papers, such as “After Keynesian Macroeconomics,” which questioned the whole approach and to decry “that countercyclical discretionary fiscal policy is neither desirable nor politically feasible.” 3

"My purpose here today is not to explain this recent revival of a failed approach to policy, but rather to summarize the facts which once again raise doubts about its effectiveness. I take a macroeconomic perspective, looking at the impact of ARRA on the major components of GDP, such as government purchases and consumption expenditures. Changes in GDP are of course directly related to employment growth, with faster growth of GDP creating more jobs. I make use of a new data set developed by the Bureau of Economic Analysis (BEA) at the Department of Commerce which traces the impact of ARRA on the economy through the National Income
and Product Accounts, the major source of data for macroeconomic analysis. I present and analyze the data through a series of simple graphs, but the findings can be verified and supported through statistical analysis."

@Fundamentalist

I'd counter with the CBO's numbers that the ARRA increased GDP by 1.7-4.5% and employment by 1.4-3.3 million jobs. See http://cboblog.cbo.gov/?p=1326.

Further, I haven't seen any decent model from Taylor. His 2009 paper supposedly debunking fiscal stimulus made that finding because he assumed that the Fed would tighten monetary policy to counteract the stimulus. No reason for that assumption, and it turned out to be wrong, and is still wrong on an ongoing basis.

I didn't see a reference in your link, but maybe he has further research. In the link you provide, he also makes the ridiculous error of failing to compare the post-ARRA world with predicted output and employment without the ARRA. In summation, dude needs to be much more thorough.

So we're talking about shrinking a $1.4T deficit by $61B (i.e., shrinking the deficit by 4.4%, which leaves it at ~$1.339T, still pretty big), which looks like it might shrink economic growth by ~40% over the next year. (now there's some asymmetry...)

Which in an economy of some $15T amounts to lost growth of ~$300B.

In other words, that $61B of spending translates into $300B of projected growth, or roughly 5x. Maybe not as good an investment as universal pre-school (~7x, last I heard), but pretty darn good, no?

As alternate path, I'd be curious to know what eliminating the tax cuts on incomes over $250k would do to growth. Because that would shrink the deficit by $100B (i.e., 64% more than the Republican approach, presumably making it more fiscally responsible) while retaining tax cuts on the first $250k (i.e., a not insubstantial amount).

I'm guessing that folks who make that much aren't going to change their spending habits dramatically based on the marginal few points on income that is manifestly disposable.

Anyone know if this alternative has been examined?

These types of discussions are maddening. GDP is a maddening measure. It's pre-eminence is tantamount to measuring just a company's sales--without any regard whatsoever to its earnings or capital structure. According to Goldman, if I borrow enough money to buy a million iPad2's then sell them at a 20% loss, I'm doing just great. Heck, my 'economy' would still be improvified if I bought the iPads on credit and just threw them in the ocean (or dropped them from great altitude onto Afgan villages).

We need a new measure of national wealth (liquid assets plus capital stock, minus debt owed to non-citizens, adjusted for inflation against a basket of raw materials) and just measure its change over time.

Furthermore, and great thanks to Heimdall's number crunching, we are freakin crashing even by the flawed measure of GDP.

If the government balanced its budget on the back of a libertarian unicorn, that would reduce GDP growth by roughly 25 percentage points, to -20% in 2011. Absolutely bang up recovery for sure, totally solid. They don't call them Benjaminz for nothing.

But I guess we can take solace in knowing that all that currency debasement which doth bequeath America's holographic prosperity dilutes a great many foreign dollar holders along with us chickens.

Mr. Dean, there are plenty of economists who disagree with Taylor, but most of them use models that assume a high Keynesian multiplier. In other words, they assume what they're trying to prove. Take another look at Taylor's paper. The link is in my post. I think his method is much more honest and scholarly.

"His 2009 paper supposedly debunking fiscal stimulus made that finding because he assumed that the Fed would tighten monetary policy to counteract the stimulus. "

I don't think that is true. Read the paper again.

Heimdall: " I'd be curious to know what eliminating the tax cuts on incomes over $250k would do to growth."

It's not likely that it would bring in much more revenue because of the Laffer curve. In addition, the money taxed would probably come out of investments, which would reduce future job growth. The money that the rich don't consume isn't sitting in a bank as cash, or in a warehouse as gold doing nothing. All of it is working hard as investments which provide jobs.

Pacer, yes, gdp is a maddening measure. It's easy to boost gdp and make all of us poorer at the same time. WWII did that very well. The only decent measure of wealth we have is real per capita gdp, but as you point out we should subtract the national debt from that for a good statement of our position.

To cut through the fog, keep in mind that no nation has ever, or ever can tax and spend its way to prosperity.

fundamentalist,

"It's not likely that it would bring in much more revenue because of the Laffer curve."

Allow me to point out that the Laffer curve has two sides. On one side, the more you decrease taxes, the greater the revenue. On the other side, the more you decrease taxes, the lower the revenue.

Regarding our current situation, with the exception of 1988 - 1992 (when it was between 28% and 31%), the marginal top tax rate is at 60-year lows (at a current 35%). Coincidentally (?), tax revenues as a percent of GDP are also at 60-year lows.

It would seem that we are on the other side of the Laffer curve than you seem to think we are.

[For context: letting the tax cut on the top bracket expire for incomes over $250k would have raised it to 39.6%, or 4.6% more than the current level. The average top tax rate since 1950 has been 59.72%, 24.72% more than the current level. My recollection is that the US has been pretty prosperous with relatively high top tax rates, the Laffer Curve notwithstanding...]a