Saturday, June 5, 2010

Pick a number, any number -- stimulus edition

It may be the most fundamental question in in statistics: what number (or set of numbers) do we use to measure some property. It is usually the first thing we have to ask ourselves and we often struggle with the question.

One of the simplest examples of this is "do we use net or gross?" It's hard to imagine a more obvious question and yet I have seen cases in the business world that used gross when net was called for and the results were disastrous.

Today's related case comes from this worthwhile post by Stephen Gordon who argues that the number we generally use to discuss stimulus isn't just wrong; it doesn't even get the sign right.

Stimulus? What stimulus?

Robert Reich on the risks of a 'double-dip' recession in the US:
The only reason the economy isn’t in a double-dip recession already is because of three temporary boosts: the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can’t continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories).

Emphasis added.

There has been much talk of the size of the US federal stimulus, and much debate about whether or not it has been an effective counter-cyclical policy instrument.

But it's important to remember that the proper measure for fiscal stimulus is not spending by the federal government; it is spending by all levels of government. And when you look at the contributions to US GDP growth (Table 1.1.2 at the BEA site), total government spending has been a drag on growth over the past two quarters. The increases at the federal level have not been enough to compensate for the spending cuts at the local and state levels.




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