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How to Spur an Economic Boom

 
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PostPosted: Sun Jan 25, 2009 1:18 pm    Post subject: How to Spur an Economic Boom Reply with quote

My comment: Once the market is cleared of excess assets and goods, then nominal output (i.e. real output and inflation) will expand. An expansion in nominal output will raise "animal spirits," generating a virtuous cycle of economic growth. The most efficient way to spur an economic boom is a large tax cut, e.g. $2,000 per taxpayer (through a limit on federal tax collections and an increase in unemployment benefits).

Krugman's slow, inefficient, and unfair plan:

New York Times
The Obama Gap
By PAUL KRUGMAN
Published: January 8, 2009

Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it’s able to sell.

Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things.

To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.

Now, fiscal stimulus can sometimes have a “multiplier” effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.

But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts — and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. (A number of Senate Democrats apparently share these doubts.) Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: “lots of buck, not much bang.”

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.

http://www.nytimes.com/2009/01/09/opinion/09krugman.html?_r=1&em
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