Stimulus package form follows function

WASHINGTON, Dec. 1 (UPI) -- A U.S. stimulus package that spent directly on projects would have a multiplying benefit on the economy, a prominent economist has said.

Mark Zandi, chief economist at Moody's Economy.com said every dollar spent on projects generates $1.50 in economic output, The New York Times reported Monday.

Dollars spent on projects turn into salaries, which are spent in stores. The stores then hire workers to keep up with the increased business, creating a "multiplier effect," the Times said.

A stimulus package that made up of tax breaks does not multiply in the economy as a portion goes into savings and import purchases, which do not contribute to the country's gross domestic product.

With tax breaks, "the multiplier effect is clearly less than $1 and perhaps as low as 30 cents if only some of the tax break is spent," Nigel Gault, chief domestic economist for Global Insight told the Times.

President-elect Barack Obama has said a recovery package should create or save 2.5 million jobs, which would require the GDP to swing from around minus 4 percent to at least 2.5, the Times said.

But, the faster the economy slows, the more expensive that turnaround becomes, economists said.