10. Effects of Stimulus Programs on GDP, Net of Crowd Out Effects

This chapter uses two methods to calculate the effects of stimulus programs, net of crowd out, on the GDP. Both methods indicate GDP declines when stimulus programs are enacted, from $0.47–$0.89 per dollar of tax cut-induced deficit, to between $0.35–$0.57 per dollar of spending increase-induced deficit. The effect of American Recovery and Reinvestment Act of 2009 (the Obama stimulus program) is calculated. It was estimated to have negatively affected both GDP (declining $0.73 per dollar of stimulus) and unemployment (rising 1.36 % for each of two years). No specific type of tax cut or spending increase had positive effects, contrary to the Gale and Orszag hypothesis. Results contradict several Krugman hypotheses as to why crowd out cannot be a problem affecting the success of stimulus programs.