And A Second One Would Be An Even Worse Mistake

The stimulus package was introduced a year ago and there’s now a lot of discussion as to whether it was effective or not, and although a definitive answer is hard to come by, I’d say that an extra $600 billion of public spending at the cost of $900 billion in private expenditure, was a very bad deal indeed!

What’s more, the cost of the package has so far risen from an estimated $787 billion to $862 billion, and as I type the two major questions that need to be answered are;

1) Did the government’s spending reduce or increase private spending?

2) Did public-sector hiring reduce or increase private hiring?

The Good And The Bad

If we look at short term public investment and consider things such as building a bridge or a new highway or even fixing potholes, then the stimulus package might appear to have been a good plan.

But if you then factor in the fact that the $600 billion of government spending added heavily to government debt that will have to be paid for at some point by raising taxes then it looks bad.

And The Ugly – A Massive Reduction In GDP

Let’s suppose that the government will collect an additional $300 billion of taxes in each of 2011 and 2012 then using a tax multiplier of minus 1.1, and a allowing for a one-year lag, then the higher taxes would reduce GDP by $330 billion in each of 2012 and 2013 and to make things worse, countries with larger public sectors tend to grow slower over the long term.

What Do The Figures Mean?

Viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending, but it comes at the cost of $900 billion in private expenditure which is clearly a very bad deal, and adding a further stimulus package in 2010 would be an even worse mistake.