As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment.
and suggests a number of revisions and refinements.
In the Wall Street Journal Lawrence Lindsey provides something even more valuable in pointing to a report from Christina Romer and Jared Bernstein identifying a number of signals that would help determine whether the stimulus plan were working or not:
If, for example, the unemployment rate appears to be peaking at around 8% and shows some modest signs of declining by year’s end, then the administration should take comfort that it took the right approach. But if the unemployment rate is over 8%, and more important, still appears to be climbing, then it might be advisable for the administration to propose tax cuts and less spending in its budget next year.
One other metric in the report should also be watched — the composition of employment. Mr. Obama has stressed that he believes that his plan is essential to the revival of the private sector. This makes sense; merely expanding government would simply increase the burden on the private sector, but a larger private sector could easily cover the added costs of a larger government.
The administration’s “Job Impact” report estimates that nearly 3.7 million jobs will have been either created or saved by the end of 2010. Of these, only 244,000 will be in government. Since the unemployment rate is estimated to be 1.5 percentage points lower at the end of 2010 as a result of the plan, this gives us a rough estimate of total jobs saved by the plan at 2.2 million. This means that the administration projects that the number of private-sector jobs will grow by about 1.25 million and the number of government jobs will grow by about a quarter million between now and 2010.
This ratio of roughly 5-to-1 of private sector versus government jobs roughly mirrors the current makeup of the job market. Thus, a second test of the stimulus package’s effectiveness is that the mix of private-sector to public-sector jobs at the end of 2010 should be roughly what it is today. That would suggest to this administration and future policy makers that a stimulus bill oriented toward public-sector spending is an effective way of expanding the private economy, an essential ingredient toward sustainability of the higher level of spending.
Regardless of the merits of any particular plan enacting some kind of stimulus plan is a political necessity. A roadmap for figuring out what to do next is just what the doctor ordered.