Debates around the stimulus and multipliers can get pretty heated pretty fast, so I’m hesitant to toss in any comments on the issue lest I inadvertently propose an argument that Condy Raguet proved wrong back before Vilfredo Pareto was even born, thus marking myself as an economic philistine who should have spent more time reading Minsky. Nevertheless, I’m going to humbly offer a quick thought.

Paul Krugman scolds the Obama administration for their too small stimulus because:

“Those economic half-measures have landed the Obama administration in a trap: much of the political establishment now sees stimulus as having been discredited by events, so that it’s very hard to come back and scale the policy up to where it should have been in the first place.”

When he says “half-measures” I’m pretty sure he’s attacking the size and not the form of the stimulus. He’s written before that the stimulus is working “just about the way textbook macroeconomics said it would”, and the “truth.. is that the stimulus was too little of a good thing…it helped, but it wasn’t big enough as you could expect given it’s size”. Although I’m sure it’s not the exact same kind of stimulus he would have crafted if it were up to him, he clearly sees the size and not the kind as is it’s primary failure.

My question is, if the “the political establishment” is incapable of recognizing that the $787 billion stimulus saved, by his accounting, about a million jobs so far, what basis is there to believe that they would recognize the success of 1.5 million jobs for $1.2 trillion dollars? That is what we would get if we got the same bang for our stimulus buck that Krugman estimates we got out of the first part, which is around 1,200 jobs per $1 billion, and we assume that Obama delivered the $1.2 trillion upper-end of what Christina Romer wanted and Krugman approved of.

This also assumes, quite optimistically, that the second $413 billion of stimulus would be at least as effective as the first $787 billion. My hunch is that we’d get diminishing returns to both the efficiency of government spending and real multipliers, but I could be wrong.

All I’m saying is that even if you believe all of Krugman’s assumptions about the effectiveness of the stimulus, I find it hard to believe that the “political establishment”, or the public for that matter, would be any more likely to agree with Krugman about the effectiveness of marginal stimulus dollars than they were with the stimulus we got.

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