CBO estimates that the legislation implies an increase in GDP relative to the agency’s baseline forecast of between 1.4 percent and 3.8 percent by the fourth quarter of 2009, between 1.1 percent and 3.4 percent by the fourth quarter of 2010, between 0.4 percent and 1.2 percent by the fourth quarter of 2011, and declining amounts in later years. Beyond 2015, the legislation is estimated to reduce GDP by between zero and 0.2 percent.
This will be used to argue that the stimulus harms our economy over the long-term. Is it correct? Sort of. CBO explains that "the principal channel for [the reduced GDP], which would also arise from other proposals to provide short-term economic stimulus by increasing government spending or reducing revenues, is that the law will result in an increase in government debt."Italics mine. Reducing revenues is another way of saying cutting taxes. So CBO is slyly saying that the tax cut proposals favored by Republicans would have had the same long-run impact. But the basic argument here is simple: The stimulus increases the debt. The debt decreases private investment. And that decreases productivity.But the CBO is assuming no policies aimed at deficit reduction. They estimate the impact of the stimulus alone -- not future policy corrections to the stimulus bill. This is why the Obama administration is obsessed with long-term deficit reduction. If they reduce the debt, the stimulus helps the economy in the short and the long term. And then there's the longer term. CBO says that "other provisions, such as funding for grants to increase access to college education, could raise long-term productivity by enhancing people’s skills. And some provisions will create incentives for increased private investment. According to CBO’s estimates, provisions that could add to long-term output account for between one-quarter and one-third of the legislation’s budgetary cost." So around 30 percent of the bill is spending that will make the economy more productive in 15 or 20 years. That, however, is beyond the time frame the CBO is examining in this paper. So what the CBO is saying, in sum, is that we can expect a strong short-term positive effect, a weak long-term negative effect if the deficit is not cared for, and increased productivity over the very long-term.
