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Posted at 05:00 PM ET, 09/09/2011

Is the cost of Obama’s stimulus underestimated?

The White House says President Obama’s new program of tax cuts and spending increases — a.k.a. stimulus — will cost $447 billion. Well, not exactly, says a leading economist. The actual cost would probably range between $1 trillion and $1.5 trillion over a decade. If he’s correct, the addition to the federal debt would be much higher than advertised.

This message is from Michael Mussa, a former chief economist at the International Monetary Fund who’s now at the Peterson Institute for International Economics.

Here’s his reasoning. Yes, the cost is $447 billion in 2012. But what happens after 2012? “We get to 2013: Do we raise the payroll tax back up? Do we stop extended unemployment benefits? . . . That does not make any sense,” says Mussa. The economy and jobs aren’t likely to be growing so rapidly to justify ending the full program cold turkey.

It especially doesn’t make any sense, he argues, because it would coincide with other deficit cuts for 2013 mandated by Congress as part of the deal to raise the federal debt ceiling. So the economy would face a double whammy.

To lighten the blow, Mussa says, Obama’s new stimulus would probably be phased out over a number of years, raising its full cost well beyond the one-year figure. The president has said the program would be paid for by additional future deficit reductions, but it’s unclear whether his pledge covers these potential costs.

Mussa made his comments Friday at the Peterson Institute’s semi-annual economic outlook conference.

By  |  05:00 PM ET, 09/09/2011

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