Wednesday, January 28, 2009

Reading is stimulating

Powerline's "Hindrocket" --

The International Monetary Fund projects that the U.S. GDP will contract by 1.6% in 2009, canceling out a modest 1.1% growth in 2008. That's not good, but it's better than the IMF predicts for any developed country other than Canada. The IMF projects Germany's GDP to be down 2.5% this year, France's 1.9%, the U.K.'s 2.8% and Japan's 2.6% ... If the IMF is right, one effect of the current global downturn will be to increase the economic gap between the U.S. and rivals among the developed countries. At the same time, the IMF projects less developed economies (like China's and India's) to continue to gain on the developed world.

All of which offers more evidence that the hysteria currently being whipped up in Washington over the alleged need to add another trillion dollars in federal debt is overstated, at best.

This is a case where one needs to read the actual IMF forecast --

Consequently, unlike the November WEO Update, the new projections incorporate a substantial fiscal expansion. Specifically, fiscal stimulus in G-20 countries in 2009 is projected to be 1.5 percent of GDP. Deficits are also expected to be boosted by the operation of automatic stabilizers and the impact on revenues of sharp asset price declines, as well as the costs of financial sector rescues.

In other words, the Fund assumed a discretionary package of 1.5% of GDP for all of the world's large economies in addition to a lot of budget deterioration due to the crisis. US GDP is about $14.4 trillion, so the assumed stimulus for 2009 is about $216 billion. The consensus Congressional Budget Office estimate is that the US stimulus will amount to $169 billion up to 1st October 2009, and a chunk of $356 billion that would come in the following 12 months. If we guess that one-quarter of that $356 billion is coming at the end of 2009, then the total 2009 stimulus is $258 billion.

Thus the IMF forecast that he uses as proof that the Democratic package isn't needed assumes that something very like the Democratic package passes -- and soon! Among the mistakes he's making is using multi-year cost estimates in the context of the IMF's one year forecast. It's the type of mistake one makes when politics is trumping analytical motivation.

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