Stimulus: To Spend or Not to Spend?

Economists are engaged in a fiscal feud over Obama's spending plan and how much of a boost it will give the recession-wracked economy

By Michael Mandel

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As the House of Representatives prepares for a Jan. 28 vote on the $825 billion Obama fiscal stimulus bill, politicians want to know: How much does boosting government spending or cutting taxes help the private sector? Can massive fiscal stimulus, as Obama is calling for, create jobs and increase economic output?

You might think these simple questions would have clear answers. Remember, macroeconomists have been studying the U.S. economy for decades. After all this time, we should have some general agreement on the size of the "multiplier"—that is, whether an extra dollar of government spending leads to gross domestic product, or GDP, going up by more than one dollar, or less than one dollar. To put it another way, it's essential to know whether the Obama economic package will stimulate the private sector or actually drain resources away from the rest of the economy.

An Intellectual War

In their analysis, the top Obama Administration economists, Christina Romer and Jared Bernstein, used a multiplier of roughly 1.6 for government purchases and about 1 for tax cuts. These figures suggest, for example, that a $100 billion increase in government purchases would lead to GDP going up by $160 billion. Out of that $160 billion, $100 billion would be the direct result of the original stimulus and $60 billion would be the increase in private-sector economic activity. A tax cut of $100 billion, by these numbers, would generate a $100 billion increase in GDP.

But among top economists, there is hardly consensus about the size of these multipliers, or even agreement about the right range. Instead, we are getting the equivalent of a full-scale intellectual war, with Nobel prize winners and leading economists actively attacking each other in public.

On one side are a very long list of pro-stimulus economists, such as Nobel winner Paul Krugman of Princeton University, who believe government spending can have a positive impact in today's extremely weak economy. On the other side is a shorter but eminent list of economists who are skeptical about the benefits of stimulus, including Nobel winner Gary Becker of the University of Chicago and top macroeconomist Robert Barro of Harvard.

"What's been disturbing," Krugman recently wrote in his blog, "is the parade of first-rate economists making totally nonserious arguments against fiscal expansion." In turn, Tyler Cowen, a conservative economist at George Mason University, wrote on his widely read blog Marginal Revolution that "pro-stimulus proponents… are not putting up comparable empirical evidence of their own for the efficacy of fiscal policy and there is a reason for that, namely that the evidence isn't really there."