A stimulus primer

There are macroeconomic effects (the extent of stimulus and the impact on employment) microeconomic effects (money well or badly spent) and distributional effects (to the rich or to the non-rich). It really isn’t any more complicated than that.

Purely as stimulus, a stimulus program attempts to increase economic activity and decrease unemployment. Those are linked but not identical goals, since the same level of economic activity can support different numbers of jobs depending on the average wage or salary of the jobs involved; you can make more $20,000 jobs for a billion dollars’ worth of stimulus than you can $100,000 jobs.

The stimulus value – the macroeconomic effect – of an expenditure or tax cut depends on (1) how quickly it gets paid out; (2) how much of the resulting additional income gets spent rather than saved or used to pay down debt; (3) how much of the additional income generated by the amount that is spent rather than saved is itself spent rather than saved (i.e., the multiplier); and (4) how much of it gets spent for domestic products rather than exports.

So claims like “spending on family planning doesn’t stimulate the economy” or “spending on re-sodding the National Mall doesn’t stimulate the economy” are simply nonsensical, suitable for recitation by knaves to fools. “Buy American” provisions help on #4, but only if we make the implausible assumption that other countries won’t make the same provisions in their stimulus packages.

In addition to its effect on current economic activity and unemployment, the money spent (or returned in tax cuts) under the stimulus plan will be spent on something, and those things may have different levels of current or future value: microeconomic effects. Helping people buy SUVs will stimulate the economy, but make us worse off in the future in both economic and environmental terms compared to helping people buy hybrids.

Finally, both the direct stimulus expenditures and the resulting changes in economic activity have distributional effects: we all care who gets how much, with Republicans wanting more of it to go to the rich and Democrats wanting more of it to go to the poor.

Got it? Macroeconomic effects, microeconomic effects, and distributional impacts. That’s all there is; there ain’t no more.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com