Ed Lazear on the Stimulus Package

From the WSJ editorial page:

Only a small share of the spending will occur in 2009, even though Keynesians would argue that stimulus spending should be frontloaded to kick-start growth. The Congressional Budget Office estimates that the largest share of the spending will occur in 2010, with the amount in 2011 being slightly larger than in 2009. Again, the timing exacerbates the problem: It will be tough to cut back on spending written into budgets as far out as 2011.

CBO Director Elmendorf provides an interesting counterpoint in his comments from June (I believe the same document Professor Lazear drew his statistics from):

Many forecasters expected a large gap between actual and potential output to persist for some time. (In CBO’s forecast the output gap was 7 percent of potential in 2009 and 2010 and 5 percent in 2011.) Therefore, policies that provided stimulus for an extended period of time seemed appropriate.

Moreover, fiscal stimulus that ends before the economy has started to regain its footing runs the risk of exacerbating economic weakness when the stimulus ends.

Thus, Professor Lazear must believe the recession will be over soon, and — more importantly — that we will revert to potential GDP in short order. He’s certainly free to make that prediction. But when considering his record on predictions, I’m reminded of this quote from WSJ May 2008.

“I would be very surprised if the NBER, looking back at this period, would date this as a recession,” Mr. Lazear said. There are even indications that revised first-quarter estimates would be slightly stronger than 0.6%. “The optimists seem to have been closer to right on that than the pessimists,” he said.

As many readers might recall, most indicators that the NBER Business Cycle Dating Committee (BCDC) pays attention to had plateaued or started to decline by April of that year (see this April 23, 2008 post); and in fact the NBER declared the beginning of the recession to be December 2007.

Here is CBO’s assessment (June 2) of the impact of the ARRA on the output gap, using the mid-point of range of estimates of multipliers.

Figure: “Effect of ARRA on the Output Gap,” from D. Elmendorf Implementation Lags of Fiscal Policy (IMF conference, June 2, 2009).

Here’s a useful set of points to remember when assessing the stimulus package, from CBPP, yesterday.

Ed Lazear on the Stimulus Package

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