Stimulus Package

Mark Thoma is a really good economist, and he has done some crunching on the mooted stimulus package. His full post is here, but the upshot is this:

Obama's team has announced a plan to create (replace?) 2.5 million jobs by the end of 2010. At $700 billion in stimulus, this works out to $280,000 per job created.  Seems a little high, doesn't it?  There are several reasons this looks big:
1) The government will actually spend less than $700 billion
2) Obama's team is low-balling the job creation estimate
3) Obama's team thinks that government spending has a small effect on GDP (and hence on employment)

If you take pretty standard macro-economic results seriously, then the $700 billion should generate about 2x$700bn = $1.4 trillion in new GDP.  (We think the multiplier on government spending is about 2. Why is it bigger than one? Because when the govt spends money, that money ends up with companies who use it to pay employees, who use it to buy things like plasma TV's and Cheetos, which then gives money to the workers who make Cheetos, etc. etc.).   So the $1.4 trillion in new GDP is an increase of about 10% over last years total GDP (just under 14 trillion).  Historically, every 2% increase in GDP yields about 1% lower unemployment.  So that means unemployment should go down by 10% x 1/2 = 5%.  A 5% increase in employment would be about 5% x 155million = 7.75 million jobs. 

So this would indicate that the plan would be spending $700 bn / 7.75mil = $90,322 per job.  That's only about a third of the $280,000 per job number you get from the Obama numbers.  So it seems likely that the Obama team is underselling their potential impact.  This is probably smart, because it's a lot worse to fall short of your jobs goal than to come in ahead of it. 

Is $90,322 a lot to pay to generate a job?  Think of it this way, the government is basically going to borrow that money to generate the jobs.  So that $700 bn in extra borrowing gives us each (about 300 million people) $2,333 extra in government debt.  Is *that* a lot for each of us to pay for 7.75 million new jobs?  I don't know. I guess it depends on whether you are unemployed or not.