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Size Matters Stupid

The economic literature continues to produce work that questions how realistic the Obama stimulus projections are:

Renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy. Because of modelling uncertainty, it is essential that policy evaluations be robust to alternative assumptions. We find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust. Government spending multipliers in an alternative empirically-estimated and widely-cited new Keynesian model are much smaller than in these old Keynesian models; the estimated stimulus is extremely small with GDP and employment effects only one-sixth as large and with private sector employment impacts likely to be even smaller.

In other words, the stimulus doesn’t pass the smell test. Of course, the central planners will now argue that the stimulus is too small, conveniently forgetting that it is over twice as large as any other stimulus plan in economic history outside of the New Deal. You could make that argument if you believed all government spending is characterized by increasing returns … but if that is true, then why has Japan stagnated for the last 20 years?

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