Saturday, September 14, 2013

Fantasy Fiscal Policy

How much stimulus should have been done if our government had chosen to do the job correctly?
With the benefit of hindsight, we do know roughly how depressed the economy has been; we have reasonably good estimates of the effects of government spending; so we can put together an estimate of what would have happened if we had, in fact, pursued a policy of government spending sufficient to keep output at potential.
... it would have taken $1.76 trillion in spending over the past 4 1/2 years to close the output gap. Yes, I know, it would have been politically impossible — but we’re just doing the economics here.
Given that revenue from tax collections would be higher, that means this could have been accomplished with $0.76 trillion in government debt.  Stated in terms of GDP (which would be higher), our debt would be at 76 percent of GDP instead of the 72 percent it is now.  This isn't the makings of a fiscal crisis.

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