Saturday, January 10, 2009

Stimulus math

Matt Yglesias has a very informative post up that details some of the math behind the stimulus projections. Here's how we start,

...[A]s a starting point, let’s pull out of the air the estimate that absent stimulus the unemployment rate will wind up at around 9 percent. That’s about 4 percent points over what we now think is the Non-Accelerating Inflation Rate of Unemployment (NAIRU).

Now we have to think about Okun’s Law which relates increases in GDP to decreases in unemployment. Since this isn’t a real law, people are a bit fuzzy on the math. But the consensus is that to generate a one percent decrease in unemployment, you need a 2–3 percent increase in GDP. That means $300-$450 billion per percentage point or $1.2–$1.8 trillion in additional GDP.

Yglesias goes on to briefly discuss the various multiplier effects of the specific stimulus tools, click through to read it all.

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