Stimulus Scenarios: Size, Composition, and Jobs

In a post last night, Ian looked at the Senate stimulus compromise plan and how it is relatively less effective in job creation. I thought this might be a good starting place to spin out half a dozen scenarios to try to quantify what some of the options are. With regard to the Obama scenarios, I first split the difference between the $780 billion plan (a figure claimed by Senate Gang of Four) and the $819 billion House version. I start then with a figure of $800 billion. Since this is a 2 year cost, for the purposes of the first two scenarios, I cut it in half and use a figure of $400 billion a year.

As for the size of the stimulus, it is important to remember that conditions are rapidly worsening. State governments are likely to be facing shortfalls of $350 billion this year, and this number though large doesn’t touch the budget problems that cities are having. Next add in needed spending for K-12 education, universities, infrastructure, research, and alternate energy and it is easy to see how the size of an effective stimulus could expand into the $600 to $700 billion a year range.

In the following scenarios, I look at first the most likely Obama stimulus package and then a far less likely best case one. I then look at $600 billion and $700 billion stimulus packages under two different splits between spending and tax cuts. All of these numbers should be taken with a grain of salt. My purpose is not to engrave anything in stone but only to add a few more parameters to the discussion. One final fact in assessing these plans: the economy has already lost at least 3.6 million jobs since the recession began in December 2007.

1) The Obama stimulus

Spending 58% of $400 billion = $232 billion
Tax cuts 42% $400 billion = $168 billion

Stimulus effect Spending = $232 billion x 1.4 = $324.8 billion
Stimulus effect Tax cuts = $168 billion x .4 = $67.2 billion

Overall stimulus effect = $394 billion

Assumption: $140,000 of stimulative effect per job

Overall stimulus effect on jobs = $394 billion/140,000 = 2.81 million jobs

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2) The Obama stimulus Best Case

Assume tax cuts have a much higher stimulative effect of 1 rather than .4

Best case Stimulus effect Tax cuts = $168 billion x 1 = $168 billion
Best case Overall stimulus effect = $168 billion + $324.8 billion = $492.8 billion
Best case scenario on jobs = $492.8 billion/140,000 = 3.52 million jobs

Notes: This best case tax cut scenario is unlikely. The $160 billion Bush tax rebate had an estimated stimulative value of .3 or $48 billion. Many people saved or paid down debt with it. Conditions have worsened considerably since then and so even more people may use tax cuts this way, lessening their stimulative effects. This scenario brings us back only to near pre-recession levels and remember even at that point Bush’s job creation numbers were very poor.

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3) Alternate stimulus 1A

A $600 billion a year stimulus with a 90/10 split

Spending 90% of $600 billion = $540 billion
Tax cuts 10% of $600 billion = $60 billion

Stimulus effect Spending = $540 billion x 1.4 = $756 billion
Stimulus effect Tax cuts = $60 billion x .4 = $24 billion

Overall stimulus effect = $780 billion

Overall stimulus effect of $780 billion on jobs = 5.57 million jobs

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4) Alternate stimulus 1B

A $600 billion a year stimulus with an 80/20 split

Spending 80% of $600 billion = $480 billion
Tax cuts 20% of $600 billion = $120 billion

Stimulus effect Spending = $480 billion x 1.4 = $672 billion
Stimulus effect Tax cuts = $120 billion x .4 = $48 billion

Overall stimulus effect = $712 billion

Overall stimulus effect of $712 billion = 5.09 million jobs

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5) Alternate stimulus 2A

A $700 billion a year stimulus with a 90/10 split

Spending 90% of $600 billion = $630 billion
Tax cuts 10% of $600 billion = $70 billion

Stimulus effect Spending = $630 billion x 1.4 = $882 billion
Stimulus effect Tax cuts = $70 billion x .4 = $28 billion

Overall stimulus effect = $910 billion

Overall stimulus effect of $910 billion on jobs = 6.5 million jobs

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6) Alternate stimulus 2B

A $700 billion a year stimulus with an 80/20 split

Spending 80% of $700 billion = $560 billion
Tax cuts 20% of $700 billion = $140 billion

Stimulus effect Spending = $560 billion x 1.4 = $784 billion
Stimulus effect Tax cuts = $140 billion x .4 = $56 billion

Overall stimulus effect = $840 billion

Overall stimulus effect of $840 billion on jobs = 6 million jobs