I'm going to spend a bit of time over the next few days on the stimulus plan. It is the most important bill to come down the Congressional pike in some time. I'll be using the CBOs analysis which is available here (click on PDF).
Let's start with this picture (click for a larger image):
Without the plan we're looking at a drop in GDP in the 4th quarter of this year of roughly 7% below out output potential. More importantly, look closely at the GDP baseline estimate for national GDP going forward (the solid line at the bottom). According to the CBO we would be experiencing a "net output gap" (producing at a level below out maximum potential) for 5 years. That's one heck of a big problem staring us in the face. While these are estimates and therefore subject to debate regarding their veracity, it highlights the central problem. The US has been in a recession since December 2007. Over the last 12 months the economy has lost 5 million jobs. In January, industrial production was 10% below year ago levels. GDP contracted at a 6.2% rate in the fourth quarter. In short, the US is limping right now and is clearly in need of some help.
A lot has been written about the fact the CBO estimates the net long-term effect will be slightly negative. Here's the reports statement regarding that drop (click for a larger image):
Bottom line: according to the CBO the main long-term negative is the crowding out public debt will cause relative to private capital in the market. But there are several important caveats:
In short, the CBO feels confident in their analysis of crowding out relative to private investment but not so confident regarding the long-term effects of infrastructure and education spending. The point here is a lot was made of the CBO saying this plan would hurt the economy. But -- the CBO is issuing a pretty big caveat.
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