Thursday, January 22, 2009

Kevin Murphy on the Stimulus

John Huizinga, Robert Lucas and Kevin Murphy discuss the stimulus plan at the University of Chicago. Kevin Murphy’s talk (17:20 to 31:37) has made a bit of a splash on the economic blogisphere and does an excellent job at clarifying the debate.

According to Murphy there are four factors to consider in accessing the value of a stimulus plan:

1. The Efficiency of Government Spending
2. The Size of the Multiplier Effect from Government Spending
3. The Leisure Value of Idle Resources
4. The Deadweight Cost of Future Tax Increases Required to Finance Government Spending

Most supporters of the stimulus would argue that 1 & 2 and 3 & 4 are low to non-existent. If this is the case, the stimulus is a good deal. Murphy argues (and I tend to agree) that 1 & 2 are lower, 3 exists, and 4 is substantial. Depending on the size of these factors, if Murphy is correct the stimulus is a waste.

Update: The perpetually incredulous Brad DeLong responds, kinda.

(HT: Megan McArdle)

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