CBO’s newest estimates of stimulus package’s effects

Yesterday the Congressional Budget Office posted its year-by-year estimate of the effects of the recently enacted economic stimulus package, the American Recovery and Reinvestment Act of 2009.  CBO’s graph shows three different projections of potential GDP.  Here’s their explanation:

To illustrate the short- and long-run effects of the legislation on output, with CBO’s
January baseline projection of potential GDP set as a reference point, Figure 1 shows
three different projections of the economy’s actual output: CBO’s January baseline
projection of GDP (which does not include the effects of ARRA), GDP using CBO’s
high estimate of the effects of the legislation; and GDP using CBO’s low estimate of the
effects of the legislation.

What I think is particularly interesting in their discussion is the contrast drawn between short-term and longer-term effects. The CBO notes that over the longer term, the increase in government debt with wealth held in government bonds will “crowd out” private investment and reduce “the stock of productive private capital.”  CBO assures us, however, that’s not going to occur over the near term.  Why?  Because decreased demand has already meant that firms are lowering their private investment.  Did I get that right?  Here’s what CBO says:

In contrast to its positive near-term macroeconomic effects, the legislation will reduce
output slightly in the long run, CBO estimates. The principal channel for that effect,
which would also arise from other proposals to provide short-term economic stimulus
by increasing government spending or reducing revenues, is that the law will result in
an increase in government debt. To the extent that people hold their wealth as
government bonds rather than in a form that can be used to finance private investment,
the increased debt will tend to reduce the stock of productive private capital. In
economic parlance, the debt will “crowd out” private investment. (Crowding out is
unlikely to occur in the short run under current conditions, because most firms are
lowering investment in response to reduced demand, which stimulus can offset in part.)
CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds
out about a third of a dollar’s worth of private domestic capital (with the remainder of
the rise in debt offset by increases in private saving and inflows of foreign capital).