According to John Taylor of Stanford University, the administration’s bragging about how stimulus spending created economic growth is at best overstated. Out of the 5.7 percent GDP growth between the 1st and the 2nd quarter, only 0.3 percent can be attributed to direct spending from the stimulus. He writes on his blog, Economics One:
Growth improved by 5.7 percent (from -6.4 percent to -0.7 percent). Private investment was by far the major source. Government spending contributed 1.9 percentage points, but more than half of that was defense spending which was not part of the stimulus…This one-page brief provides more details and also shows that direct spending from the stimulus contributed only 0.3 percent of 5.7 percent. We will learn more when the Department of Commerce releases data from the third quarter next week, but so far their data are very clear that the stimulus is having a negligible impact.
Several things need to be added. First, let’s not forget that the economy is still not growing. It’s just not doing as bad at it was.
More important, we should be really careful with GDP estimates because of the impact of government spending. The GDP includes government spending and it assumes that you’re getting what you pay for. In other words, the assumption is that if the federal government pays a contractor $200,000 per year to repave some unused roads in the middle of nowhere, they assume he’s creating $200,000 per year of genuine value.
By contrast, as my colleague Garett Jones explained to me recently:
GDP measures are tougher on private-sector spending: So if Exxon Mobil pays an engineer $200,000 per year, that only shows up in GDP if the engineer finds an extra $200,000 of oil to sell, or builds a new machine that sells for $200,000, something like that. So our GDP measures of “government spending” are awful — and when the government is in a race to spend money as quickly as possible, these measures are going to be even worse than usual.
Plus, let’s not forget where the stimulus money is going: Over 85 percent of the money so far has gone to the Department of Health and Human Services, the Department of Education, the Department of Labor, and the Social Security Administration. These agencies don’t oversee exactly what I would call shovel-ready projects. It’s more like bureaucrat-ready projects. But of course as we know, the administration doesn’t really care since what matters it to get money out the door and getting that Keynesian multiplier working. Never mind that this is a myth.