Nope: No Signs That Britain Has Reached the Edge of Its Debt Capacity and Needs Fiscal Consolidation Either
Why the House Should Just Pass the Health Care Bill, Part CCXIV

The Carrying Cost of the ARRA...

I'm told that Republicans are upset that the interest costs of funding the ARRA--the fiscal stimulus program--is $100 million a day...

Well, 30 cents per person per day seems to me a small price to pay for an extra 2 million jobs right now--that's an extra $300 billion a year in GDP, an extra $3 per person per day in more stuff. To pay 30 cents a day and get $3 a day seems to be a very good deal.

But the $100 million figure is itself an artifact of static scoring--if you do the full analysis taking account of the fact that we are in a deep recession with conventional monetary policy spinning its wheels because of the zero nominal bound on interest rates--you get a very different answer.

As I like to say, suppose the government spends an extra $100 billion right now. It gets:

  • A $150 billion boost to real GDP--that's 100% positive gain.
  • That extra income generates $60 billion in additional tax receipts.
  • So we pay for that $100 billion of spending by taking on $40 billion of extra debt.
  • For which the U.S. must pay an average of 2% per year--a net annual cost of $800 million.

So you get $150 billion of extra production (and associated employment) for an interest cost of $2.5 million a day, 40% of the static scoring interest cost.

That means, among other things, that the right dynamic scoring cost of funding the ARRA is more like $40 million a day rather than $100 million--that for our extra 2 million jobs and $300 billion a year in production we re paying 12 cents per person per day.