Since there is often confusion in popular discussions of the net effect of the stimulus on GDP, I thought it would be useful to present Deutsche Bank’s views on the impact on both the level and growth rates of GDP. (Here we are talking about seasonally adjusted at annual rates [SAAR] growth rates and levels; cautionary notes here: , .)
From Peter Hooper, “Drivers and Drags: US Macroeconomic Setting for 2010,” Global Economic Perspectives (Deutsche Bank, Dec. 18, 2009):
Drivers of growth
Fiscal stimulus is a key near-term driver
Based in part on CBO estimates, we expect the combined
positive effects on the level of real GDP of the tax cuts,
transfers, and spending increases in the ARRA package to
peak around the middle of next year and then to begin to
diminish. Translating these level effects into impacts on
the annual rate of growth of GDP yields a boost of 1 to 2
percentage points to GDP growth through mid-2010. That
growth effect then drops to zero and eventually turns
negative during the second half of the year, subtracting
about a percentage point from growth during 2011. This is
a key reason why we see growth receding somewhat in
2011 relative to 2010. We have not assumed that a major
portion of the Bush tax cuts will be allowed to expire at
the end of 2010, but that does pose a downside risk to the
The following graph summarizes the outlook.
Chart 6 from Hooper (2009).
In other words, even as the stimulus subtracts from growth starting in the second half of 2010, the level of GDP is still higher than what would be the case in the absence of the stimulus package. Critics of the stimulus package often neglect to highlight that point.