Last week President Obama said:

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blockquote>But there’s an economic case for [extending additional unemployment insurance benefits], as well. Independent economists have shown that extending emergency unemployment insurance actually helps the economy, actually creates new jobs.  When folks like Katherine have a little more to spend to turn up the heat in her house or buy a few extra groceries, that means more spending with businesses in her local community, which in turn may inspire that business to hire one more person — maybe Kathy.

By leaving out one word, President Obama got this exactly wrong. The missing word is temporarily.

The “helps the economy” case for increased government spending on additional unemployment benefits is a traditional fiscal stimulus argument: if the government increases spending, people will have more income. They will then spend some/most of it, generating more income for others, and so on. Depending on the type of spending, economists estimate/guess the fiscal multiplier of a dollar of increased government spending (or tax cuts!), then calculate the increase in GDP that will result. From this they estimate the increased employment that will flow from the government’s fiscal stimulus.

Economists like to argue about the size of multipliers for various types of fiscal stimulus. But as best I can tell, they don’t argue that a temporary fiscal stimulus results in permanent economic growth. Once government stops spending money, the beneficial growth effect, however big or small it may be, dissipates.

Now the hope of a traditional fiscal stimulus is that it jump-starts an economy stuck in a rut, providing a big enough temporary boost that the recovery becomes self-sustaining even after the stimulus is withdrawn. Think of it like a strong cup of coffee early in the morning. If all goes well, the initial jolt gets you going enough that you maintain a high energy level even after the caffeine hit has worn off.

It is quite difficult to make such an argument for such a small proposed policy change. An additional $25 B in government spending, in a $16.6 trillion economy, doesn’t come close. It would be like hoping that one sip of coffee will jump start your day. Qualitatively the argument can hold, but it’s not big enough to be credible (assuming you buy the assumed fiscal multipliers in the first place).

President Obama should have said “extending emergency unemployment insurance temporarily helps the economy.” But he didn’t say that because it’s a much weaker argument. By […]