Monday, June 15, 2009

Summers Defending the Small Size of Stimulus...

Don't know how I missed this. Summers is asked repeatedly why the stimulus was too small. He doesn't have an answer. He alludes to "the multiplier", but the stimulus is only around 1% of GDP. The GDP gap is closer to 6-8%. Even with a multiplier of 2 -- implausibly large -- the gap isn't filled. Now, much of the economic news in the past few months suggests that the economy is getting worse at a much slower rate, and may even start to get better soon. There's almost no chance we'll see unemployment below 6 or 7% by the end of next year, however, so the stimulus won't have been wasted. On the other hand, what if the economy doesn't start to get better. What if it keeps getting worse? Then the stimulus will have been way too small, and we'll need another round, which could take awhile to be injected into the economy. That's why we (liberal economists) thought and think that the stimulus was imprudently large. There was no downside to doing too much, only a downside to doing too little, and that's what Obama did.

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