Tuesday, November 11, 2008

Issue the Go Code for Plan S

Paul Krugman guesstimates that we need a $600 billion stimulus:
So what kinds of numbers are we talking about? GDP next year will be about $15 trillion, so 1% of GDP is $150 billion. The natural rate of unemployment is, say, 5% — maybe lower. Given Okun’s law, every excess point of unemployment above 5 means a 2% output gap.

Right now, we’re at 6.5% unemployment and a 3% output gap – but those numbers are heading higher fast. Goldman predicts 8.5% unemployment, meaning a 7% output gap. That sounds reasonable to me.

So we need a fiscal stimulus big enough to close a 7% output gap. Remember, if the stimulus is too big, it does much less harm than if it’s too small. What’s the multiplier? Better, we hope, than on the early-2008 package. But you’d be hard pressed to argue for an overall multiplier as high as 2.

When I put all this together, I conclude that the stimulus package should be at least 4% of GDP, or $600 billion.

Here's another reason why $600 billion is a good number: it is bigger than China's recently announced $586 billion stimulus. We must not allow a stimulus gap!

(reference explained here; of course as a % of GDP, China's plan is much bigger....)

1 comment:

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