The $787B Stimulus

A Context for Obama's $787,000,000,000.00 Stimulus Package

In the June 10, 1934 edition of The New York Times there appeared an article by John Maynard Keynes. Keynes wrote in part:

• "For six months at least, and probably a year, the measure of recovery to be achieved will mainly depend on the degree of the direct stimulus to production deliberately applied by the administration."
• "The aggregate emergency expenditure is now declining. If it is going to decline to $200,000,000 [$200 million] monthly, much of the ground already gained will probably be lost. If it were to rise to $400,000,000 [$400 million] monthly, I should be quite confident that a strong business revival would set in by the Autumn."
• "Four hundred million dollars monthly is not much more than 11 per cent of the national income...."

I don't know how Keynes came up with his $400 million figure. But it is easy enough to scale his number up to fit the current national income.

Step one is to make sure I understand how Keynes was using his numbers. According to Series F-7 of the Historical Statistics, in 1933 the U.S. national income was $40.3 billion.

Ten percent of $40.3 is $4.03
One percent of $40.3 is $0.403
Ten plus one is eleven.
Eleven percent of $40.3 is $4.433
Eleven percent of the national income of 1933 amounts to $4.433 billion.

The stimulus recommended by Keynes adds up to a total "not much more than" $4.433 billion. $400 million monthly for 12 months adds up to $4800 million, or $4.8 billion. And 4.8 is "not much more" than 4.433, so I am satisfied that my understanding of the numbers in the 1934 article is correct.

Step two is to fit those numbers to the most current national income figures available. In 2007 the U.S. national income was $12,221 billion (according to Table 651 in the 2009 edition of the Statistical Abstract). Eleven percent of that number is $1344.31 billion.

4.8 divided by 4.433 gives a "not-much-more" factor of 1.083. $1344.31 multiplied by the not-much-more factor gives a stimulus-package size of $1455.6 billion. Call it $1460 billion.

By these calculations we need a stimulus of about $1460 billion, to be spent in one year's time. That amount is roughly twice the amount of the stimulus bill approved by Congress in mid-February 2009. So the stimulus we get may be one by which we lose much ground, as in the second excerpt from Keynes, above.

Keynes also specified that the stimulus be spent in a 12-month time frame. I hear that the spending of the current stimulus, however, will have barely begun in a year's time. So the effect must be even less, and the ground lost even more.

By June of 1934 the Great Depression had already hit bottom and things were beginning to improve, though surely no one knew it at the time. In February 2009 we know we're in a recession and there is talk of depression but again nobody knows for sure. It may be that a "scaled up" stimulus of $1460 billion is far more than we need, because our economy has only just begun the downhill slide of recession. Or it could be that $1460 billion is far less than we need because we have a massive inventory of unsold goods which must be absorbed before the slump reaches bottom three or four years from now. I don't know, and I don't make predictions. I find the numbers interesting because they provide a context against which we may compare the present $787 billion package. The current package is, by my best guess, half what Keynes might have recommended, and diluted by a lack of urgency besides.

Note that the Wall Street Bailout is a different matter altogether, as is any bailout of the housing market. Neither bailout is a stimulus. Both are desperate attempts to rescue a mismanaged economy--desperate attempts made by the very same people who have mismanaged our economy since the 1960s: Congress.

Note also that Keynes specified "direct stimulus to production." If Democrats and Republicans could simply agree on the meaning of that phrase, they would be able to develop a more bipartisan support for stimulus, and produce a more effective package in a timely manner.

As for how to pay for it, well, you have to read The New Arthurian Economics.

Arthur Shipman, 2/15/09