One more reason why 2011 looks bad

December 28, 2009

Interesting analysis from Deutsche Bank, especially the last part which I put in bold (via Econbrowser):

Based in part on CBO estimates, we expect the combined positive effects on the level of real GDP of the tax cuts, transfers, and spending increases in the ARRA package to peak around the middle of next year and then to begin to diminish. Translating these level effects into impacts on the annual rate of growth of GDP yields a boost of 1 to 2 percentage points to GDP growth through mid-2010. That growth effect then drops to zero and eventually turns negative during the second half of the year, subtracting about a percentage point from growth during 2011. This is a key reason why we see growth receding somewhat in 2011 relative to 2010. We have not assumed that a major portion of the Bush tax cuts will be allowed to expire at the end of 2010, but that does pose a downside risk to the forecast.

Me: And here is all that in chart form:



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I would argue just the opposite. The stimulus bill was never designed to stimulate the economy, since it mostly consisted of transfer payments. It most likely amounted to a net drag on growth, because it squandered the economy’s resources, and raised the specter of a significant increase in future tax burdens. To the degree the stimulus spending winds down, the economy will be more able to proceed under its own steam. Keynesian stimulus spending, in other words, has a negative multiplier.

Posted by Scott Grannis | Report as abusive

One additional comment: the expiration of the Bush tax cuts in 2011 should actually prove to be a stimulus for the economy in 2010, because it gives individuals and business an incentive to accelerate income, and to realize capital gains and reinvest the proceeds in projects with better returns on investment.

Posted by Scott Grannis | Report as abusive