This blog is in response to Jed Smith's feature post questioning whether or not the government's stimulus package was too small.
Mr. Smith recently wrote a really informative post about how to calculate the needs for a stimulus package based on Okun's Law and the GDP multiplier and how they are related to GDP and unemployment.
He arrives at the conclusion that, "The application of Okun's law suggests that the current Spending Bill is having less of an impact than is desirable." And that, "Therefore, a simple quick calculation suggests that the stimulus may be too small."
I don't disagree with any of this, however, I think that what has gotten lost in translation is that we can't treat the current economic recession with the same methods that we have treated previous ones, namely cheap monetary policy and massive government spending programs in the name of "stimulus".
There are two reasons why Okun's Law and the government's current policies is antiquated in dealing with the current downturn.
1.) The real (U-6) unemployment rate in the country is 16.4%, not the advertised 9.4%. Additionally, even the U-6 unemployment number does not account for small business owners or employees who have seen a decrease in their income.
2.) Okun's Law does not account for the massive wealth and spending power that has been sucked out of our economy and flushed down the toilet, not to return anytime soon. Between the contraction of credit, the evaporation of home equity, and the halving of stock market wealth, the spending and investment potential of Americans has been hit by a tsunami.
It begs the question then, how do you create jobs and re-build wealth? You do it through fiscal policy that would encourage new investment by reducing the capital gains rate, increasing the depreciation benefits associated with investment real estate by repealing the Tax Reform Act of 1986, and providing a meaningful tax cut to ALL Americans.
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