Thursday, October 22, 2009

Lord make me virtuous, but not just yet 

Here are three statements from Christina Romer, head of the Obama Council of Economic Advisors, regarding the stimulus and its effects. First,
The estimates indicate that as of August, the ARRA had raised employment relative to the baseline by between 600,000 and 1.5 million jobs. (p. 7)
Since the recession began in December 2007, payroll employment has fallen by 7.2 million. Given that employment growth of nearly 100,000 per month is necessary to keep up with normal labor force growth, employment is currently about nine million below its normal trend level. (p. 11)
A second challenge that we face is clearly the budget deficit. The final numbers just released show that the fiscal 2009 deficit reached $1.4 trillion, or about 10 percent of GDP. Excessive moves toward fiscal policy tightening could lead to a return to output decline and a reacceleration of job losses. The current policies that have generated a dramatic turnaround of the economy need to be seen through to their completion. The Mid-Session review released in August predicted a similarly large deficit in 2010, and substantial structural deficits even once the recession is over and the economy is fully recovered. Such long-term deficits are unacceptable and need to be dealt with. Over the long run, sustained deficits crowd out private investment and reduce long-run growth.

Given the current precarious state of the economy, substantial near-term spending cuts or tax increases to reduce the deficit would threaten the recovery. (p. 18)
They say they are nine million jobs below trend for full employment. Regarding my post yesterday, to get back there you have to get GDP growth (at least in real terms) to be faster than trend growth (around 2.5-3%), which is why I question whether the shock to nominal GDP is permanent. But think about what this says -- the stimulus is working, but not nearly sufficient such that we can avoide the crowding out and private investment decline and decrease in real GDP. If we reduce investment you will get a permanent shock. So if they continue to keep the stimulus going they could create a permanent loss, but that would be OK in return for buying 600,000 to 1,500,000 jobs "saved or created" now. How much of a price does Prof. Romer believe we should pay for those jobs?

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