Charles W. Calomiris's response to 'How's that stimulus working? And will Gov. Charlie Crist crowd out the Dem in Florida Senate?' - The Arena | POLITICO.COM

Charles W. Calomiris's response to 'How's that stimulus working? And will Gov. Charlie Crist crowd out the Dem in Florida Senate?' - The Arena | POLITICO.COM: "Economists disagree about the effects of the stimulus, but overall, after taking into account the various pieces of evidence that exist, it is fairly clear that the effects were small, but not zero. Despite the disagreement, several things can be said objectively about the extent and the sources of the reasonable disagreement over the effects of the stimulus.

First, no one, including the administration, claims that the stimulus improved the level of GDP by more than about 1 percent. Hence, the claims by the president that the stimulus averted 'a depression' are nonsensical, unless one regards an extra one percent decline in GDP as the threshold from a recession like the one we just experienced to a Great Depression; no competent economist could make such an argument.

Second, the macroeconomic models used by investment banking houses and rating agencies, which have been employed in defense of the high administration estimate of 1 percent, are known to produce exaggerated estimates of spending effects and are not taken seriously as forecasts even by competent economists in those investment banks. Those models uniformly assume things that economists know are not true (e.g., they assume that people consume a fixed proportion of current disposable income, while economists know that long-term income is what matters more for most people's consumption; and they assume that housing wealth has a big effect on consumption, which is contrary to economic theory and a growing chorus of microeconomic studies). Those assumptions, which are crucial for many of the issues related to measuring the effects of any government stimulus, are made because they simplify measurement, but they distort the predictions of the models, and make them particularly unhelpful for forecasting the effects of stimulus policy.