Not Stimulating Enough

Obama's domestic economic team of Christina Romer and Jared Bernstein have put out the estimates of the effect of Obama's stimulus plan on the economy. The Kroog calls it too little, too late.

The key thing if you want to do comparisons is to note that I made estimates of the average effect over 2009-2010, while they do estimates of effect in the fourth quarter of 2010, which is roughly when the plan is estimated to have its maximum effect. So they say the plan would lower unemployment by about 2 percentage points, I said 1.7, but their estimate may actually be a bit more pessimistic than mine. They have the plan raising GDP by 3.7 percent, but that’s at peak; I thought 2.5 percent or so average over 2 years, again not much difference.

So this looks like an estimate from the Obama team itself saying — as best as I can figure it out — that the plan would close only around a third of the output gap over the next two years.

One more point: the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am.

Bottom line: even if I use the Romer-Bernstein estimates instead of my own — there really isn’t much difference — this plan looks too weak.

Personally, I think the estimates of the worst-case scenario unemployment rate of nine percent are far, far too optimistic. Businesses have done everything they can to keep from having to lay people off...and we're going to see quite a bit of them go over the edge in 2009 and have no choice but to lay off a healthy chunk of their employees. This in turn is only going to stall out the economy even further. I don't think even Krugman is giving enough weight to the fact that Americans buying things is the singular engine of our economy, and Americans aren't buying, we are screwed.

Worst case scenario is closer to 12 or 13%, with a real unemployment U6 number of twice that. I think we're going to come awfully damn close to those numbers, and that it will take well into the end of next decade for us to recover. By then America will be a very different country. It took us 16 years and a World War to get us out of the last Depression.

And by that time, the world will have passed us by. America is Britain, circa 19th century. Who will rise to take our place, Russia? China? India? Who knows.

The decline of the American Empire is upon us.