How much fiscal stiimulus is needed? (Updated for Q4 forecast of real GDP of -3.9%)

[Updated to base estimates on the Macroeconomic Advisers estimate of -3.9% for Q4 real GDP.]

No matter how much money the government dispenses as economic stimulus, it is all for naught if it does not stimulate strong enough economic activity and expectation of future activity so that new jobs are created. So, two principles are needed: 1) commitment to continue the stimulus until the economy no longer needs it, and 2) enough money is spent each month to generate enough economic activity to force businesses to rehire or create new jobs. So, an open-ended commitment is needed, not unlike what we currently have with Iraq and the war on terror.

My best guess is that the economy is currently on a -1% to -3.5% annualized track. Given a $14.4 trillion annual economy, -1% annualized corresponds to a decline of -$12 billion per month ($14.4 trillion times 1% is $144 billion, divided by 12 is $12 billion.) A -3.5% annualized decline corresponds to a decline of -$42 billion per month.

But, getting back up to zero decline is not going to stimulate creation of jobs. We probably need to get up to +2% or even +3% so that businesses actually "feel" that the economy is "strong" enough (artificially, of course) to warrant and sustain rehiring and creation of new jobs.

So, my math says we would need a minimum of 3% (to get from -1% to +2%) to maybe up to 6.5% (to get from -3.5% to +3%.) In dollar terms that would be a range from $36 billion to $78 billion per month. That may sound like a modest amount of money, compared to say $700 billion, but that would be every month for some unknown number of months.

Again, this would have to be an open-ended commitment. I do not imagine that three or four months would be enough, but I do not imagine that more than a year would be required. That would be a range from a total of $180 ($36 billion for five months) to upwards of $780 billion ($78 billion for 10 months.) That may sound like a lot of money, but it may be what is needed to get the economy back on track.

As a nominal, initial plan, I would suggest starting with the estimate of annualized Q4 real GDP of -3.9% from Macroeconomic Advisers and pump out $83 billion per month for four months and then calibrate at that point based on actual economic activity and job creation. That would mean a nominal initial commitment to spend $332 billion.

So, that is my number for how much fiscal stimulus is needed to get the economy back on track: $332 billion. That is what Congress and the White House need to commit to once Barack Obama takes office.

-- Jack Krupansky