Measuring fiscal boosts

June 25, 2009 in Economics

Brad DeLong is an esteemed economist at U.C. Berkely, but I am confused by evidence he uses in a recent blog post. Brad uses the following graph to argue that the level of deficit spending through the current crisis does not even approach the level during WWII which he views as necessary to reduce the unemployment level:

The most perplexing thing, to me, is that DeLong says this graph shows that we are "far" from a fiscal boost a "quarter to a third" as large as the WWII one - but the height of the 2009 spike, about 15%, is more than a third of the WWII spike of about 40%.

That aside, however, does this graph really show what he's trying to measure? It displays the annual change in debt held by the public, as a percent of GDP. It is important, however, to differentiate between "World War II-style deficit spending" and a "fiscal boost", terms DeLong uses interchangeably in his argument. This graph is well suited to identifying the degree of "boost", as spikes represent sudden capital infusions (or large annual changes). However, it does not do a good job of showing the actual level of deficit spending. In fact, it is the first derivative of the level.

Here is another graph, from a different part of DeLong's website:

As this clearly shows, the government is currently borrowing on an order only seen during World War II. A spike of 40%, which DeLong uses the first chart to argue in favor of, would take us to nearly 125% of GDP - an unsupportable level. So in terms of whether or not we will see a fiscal boost on the order of WWII, the answer is probably not; we are already at such a high level that we can not sustain an increase of that magnitude.

Just to throw a wrench in things, here's another way of looking at this: the WWII spike lifted debt from 45% of GDP to 85%, or by just less than 2x. The recent cumulative spike is from 35% to 60% - also 2x. Thus, depending how you cut it, we've increased spending the same amount as in WWII (proportionate to the prior level); about half as much (in an absolute sense); or about a third as much (in terms of absolute annual change).

All of these are at or above DeLong's target level, making me wonder why he thinks "we are not there"?

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