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Letter to the Honorable Judd Gregg 1 (February 2009)

handle is hein.congrec/cbo9582 and id is 1 raw text is: CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director U.S. Congress Washington, DC 20515 February 11, 2009 Honorable Judd Gregg Ranking Member Committee on the Budget United States Senate Washington, DC 20510 Dear Senator: At your request, the Congressional Budget Office (CBO) has prepared a year-by-year analysis of the economic effects of pending stimulus legislation. This analysis is based on an average of the effects of two versions of H.R. 1-as passed by the House and as passed by the Senate. (The economic effects of those two bills are broadly similar.) Short-Run Effects The macroeconomic impacts of any economic stimulus program are very uncertain. Economic theories differ in their predictions about the effectiveness of stimulus. Furthermore, large fiscal stimulus is rarely attempted, so it is difficult to distinguish among alternative estimates of how large the macroeconomic effects would be. For those reasons, some economists remain skeptical that there would be any significant effects, while others expect very large ones. CBO has developed a range of estimates of the effects of stimulus legislation on gross domestic product (GDP) and employment that encompasses a majority of economists' views. By CBO's estimation, in the short run the stimulus legislation would raise GDP and increase employment by adding to aggregate demand and thereby boosting the utilization of labor and capital that would otherwise be unused because the economy is in recession. Most of the budgetary effects of the legislation would occur over the next few years, and as those effects diminished the short-run impact on the economy would fade. Long-Run Effects In the long run, the economy produces close to its potential output on average, and that potential level is determined by the stock of productive capital, the supply of labor, and productivity. Short-run stimulative policies can affect long-run output by influencing those three factors, although such effects would generally be smaller than the short-run impact of those policies on demand. www.cbo.gov

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