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Let's Play Counterfactual: What If Stimulus Had Been Bigger?

Most liberal economists now believe the economic stimulus was too small. I'm inclined to believe them. But exactly how much difference would a larger stimulus have made? Pretend Obama had gotten a stimulus that was twice as large, somewhere in the neighborhood of $1.5 trillion. What would the economy look like today?

To get something like an upper bound on that question, I put it to some well-known advocates of stimulus spending--like Dean Baker, of the Center for Economic and Policy Research. Here's what he said:

As a first approximation, try multiplying everything by 2. The Congressional Budge Office estimates that the stimulus added 1.7-4.5 percent to GDP and that it lowered the unemployment rate by 0.7-1.8 percentage points. If it were twice as large assume GDP growth in the 3.4 -9.0 percent range and the drop in unemployment in the range of 1.4 -3.6 pp. In other words, the unemployment rate today would be between 7.7 percent and 8.8 percent.

There is also a greater likelihood that this would have kicked off self-sustaining growth with a bigger round of investment coming on board and maybe even some real wage growth.

In other words, unemployment would have been more than a full percentage point lower than it is today. And it would be heading down faster.

OK, that's a pretty big difference.

That said, devising such a large stimulus may not have been easy. At the time, White House officials said they were having trouble finding more shovel-ready infrastructure projects and, more generally, coming up ways of ways to inject more money into the economy.

Larry Mishel, who is from the Economic Policy Institute, thinks you have to acknowledge those limits. But he also thinks it was possible to do a lot more and, to his credit, was saying so at the time. Here's what he just told me:

Well, the stimulus would have created twice as many jobs, perhaps as many as five million more full-time equivalent jobs. I must admit, however, that though the economy needed that size stimulus, I’m not sure there were good vehicles for executing such a stimulus. I’m not sure I would have wanted to double the tax cuts, and it wasn’t possible to double much of the investments and get them underway in this time period. We could have given states more relief. And, we could have extended the time period of much of the stimulus elements--unemployment insurance, investments, state relief, etc.--so we wouldn’t need to renew than now.

Five million more jobs--again, if that's correct, it's a big difference.

Of course, such a large stimulus may not have been possible politically. But that's another story.

Update: I've asked a few more conservative economists for their opinion, too, and tweaked the wording in the item to make clear there's going to be some difference of opinion on this. I'll post some of those responses when I get them. In the meantime, and on a related note, if you haven't yet read Martin Wolf's column about the price of economic timidity early in Obama's tenure, you should.