How big is big? – or – A trillion here, a trillion there, and soon you’re talking real money…

So, we’ve all been hearing about the various fiscal stimulus packages which governments around the world have been putting together. Most economists—indeed, virtually all of them except for the outer fringes—believe that such stimuli are necessary to restoring the global economy to some semblance of order. The debate now is largely over how large these packages will be and how much spending will be required to restore that sought-after order.

If I recall correctly, President Obama will be meeting with Congress today–a phrase which two years ago I didn’t expect I’d be writing—to discuss the fiscal stimulus package. As it stands, the package involves $825 billion, of which $550 billion is spending (the balance is tax cuts). This is in addition to the $700 billion accorded to the EESA/TARP bill. Ignoring the other expenditures made—because I cannot find them all in the short amount of time I want to write this—this amounts to $1.25 trillion in spending. Certainly appears large, doesn’t it?

Now consider that the estimated GDP of the United States is $14.85 trillion (from the CIA World Factbook). The $1.25 trillion (or $1.525 trillion to count the total cost to the government’s coffers) makes up a “mere” 8.4% ( or 10.3% for the larger figure) of GDP. Now, I am not a professional economist, but some quick examination of past financial crises would seem to indicate that we will be very lucky indeed if this is all we have to spend. A World Bank paper by Caprio and Klingebiel (available here) lists a significant number of financial crises which have occured around the world since the 1970s. Most of them were only resolved with expenditures significantly over ~10% of GDP. Of course, many also involved the deadly “twin” crises of currency and financial collapse, which the US almost certainly will not face. However, many did not have significant twin crisis effects–indeed, to take the example of the US savings and loan crisis, which was vastly smaller than the present crisis we are in, one can see that expenditures of 3% of GDP ultimately proved necessary to restore health to the economy. Then, 3% of GDP was $180 billion; now, it is $446 billion, so expenditures up to that amount shouldn’t even have been in doubt (recall the massive controversy over the $700 billion TARP).

Ultimately, this is all to say that, in my at least mildly-educated opinion, we will be lucky to escape with spending totalling only $1-to-2 trillion over the whole extent of the crisis.  We had a lot of money going into this, and it will take a lot of money to get us out.

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