Here is how I think the fiscal stimulus should be analyzed

TRUTH ON THE MARKET » Kevin Murphy models the stimulus–and the results aren’t pretty

At bottom, Murphy has this equation (I don’t know how to write Greek letters in WordPress, so bear with me):

[added by me: the left hand side should be bigger for the stimulus to make sense]

f(1-L) > a+d

f = how much comes out of idle (as opposed to currently employed) resources

L (Lambda) = the value of idle resources (so 1-L is the gain from moving idle resources into production)

a = government inefficiency cost

d = deadweight loss

[added by me: d is the deadweight cost of taxation]

Iff the left-hand side is greater, the stimulus would be worthwhile

Murphy’s bottom line, given his parameters (f=.5, L=.5, a=positive, and d=.8):

[added by me: d=0.8 might be a bit high, but it is roughly what tax economists would estimate]

Unless government is 55% more effective, more productive, than private output, it’s not looking good.

I am really puzzled when I read statements that say most economists want a fiscal stimulus. Not true, at least in my experience.

There are good reasons to transfer money to people being most hurt by the recession–increase unemployment insurance, increase food stamps, etc. But that is not the same as building more bridges/infrastructure. Which won’t do much since the bridges to be build are shovel-ready, meaning things that would have been done anyway. My guess is that the non-shovel ready stuff should come online about the time that we will be out of the recession anyway.

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