Jared Bernstein on the amount of spending necessary to keep those lost government jobs and drop UE by that point:
Q: Re my post on how absent all those state and local layoffs, the unemployment rate could be a point lower: How much additional stimulus would have been required from the Federal government to the States in order to have kept those layoffs from occurring? How much GDP has been lost as a result of the decrease in employment? Are these not the benefits and costs of “austerity”?
A: Rough estimates, a point of unemployment equals around two points of GDP, or about $300 billion. That’s about what we had for fiscal relief in the Recovery Act, and it worked well—probably among the most efficient components of the act. With a multiplier of 1.5—that’s my guess for state fiscal relief right now, we could get there with $200 billion (200*1.5=300).
But the costs of stimulus are actually a lot lower than that right now, because the Federal gov’t can borrow at very cheap rates, and in generating more growth, help to spin off more future revenue to pay down this debt later.
How cheap? DeLong and Summers argue that under current conditions, “fiscal policies may reduce long-run debt-financing burdens.” That’s a little Laffer-curvy for me, but if you factor in the long run losses from all the slack we end up with by sitting on our hands when real interest rates are negative, they’re surely more right than wrong.
