Posted at the Opinion Journal from the Wall Street Journal
How much will the stimulus package moving in Congress really stimulate the economy?
The evaluations to date have been incomplete, so we looked at the likely stimulative effect from the spending parts of the House and Senate bills -- over $500 billion -- and assessed the quantitative effects of four basic factors.
1) How much increase in Gross Domestic Product (GDP) can be expected from the stimulus package?
In a full-employment situation, increased government spending would largely replace private spending, so the net stimulus to GDP would likely be quite small. In the present environment, however, with growing unemployment of both labor and capital, the net stimulus would be larger since the additional government spending would put some unemployed resources to work.
For example, if the government spent money to build new homes with unemployed labor, the stimulus to GDP might be close to, even larger than, the amount spent. However, given the present housing glut, that hardly seems to be a wise policy, although it is a small part of both the House and Senate stimulus packages.
In fact, much of the proposed spending would be in sectors and on programs where the government would mainly have to draw resources away from other uses. This type of spending includes adding broadband to rural areas, spending more on health coverage, encouraging scientific innovations, developing renewable energy, as well as many other things.
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