Will Obama’s latest $990 billion stimulus package work?

The graphic below shows a breakdown of where the tax cuts are going in the latest deal the President and the Republicans in Congress have hammered out. The expected impact is that unemployment will finally start to fall from its current high of 9.6% to 5.7% by 2015 and that as economic growth picks up, the budget deficit will fall back to more manageable levels (see article).

How successful this expansionary fiscal policy will be depends on how much of these cuts will actually be spent and saved. The graphic shows that $280 billion of tax cuts will go to middle income households who are more likely to spend any additional income they receive (higher marginal propensity to consume) than higher income earners and therefore have a greater impact on overall GDP. A while ago I blogged about the importance of the multiplier for policymakers when deciding which of their policy options will have the most desired impact (More bang for your buck) and the evidence suggested that government spending rather than tax cuts, would have a larger impact on total demand. With US unemployment still high and this plan worrying some commentators, Obama and co will hope they get some value for almost a trillion dollars spent!