This morning in the Wall Street Journal, economists John Taylor and John Cogan have a piece that makes a fundamental point about why stimulus spending is a totally ineffective way to jump-start an economy. So far, much of the debate has been focused on what the size of the multiplier is and what that value means — basically, a fight over how much of a boost the economy gets from a dollar in government spending. But, as Taylor and Cogan write, it doesn’t really matter what this multiplier is, because recovery by stimulus spending can’t work.
The bottom-line is the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public. The net impact on aggregate economic activity is zero, regardless of the magnitude of the government purchases multiplier.
This behavior is a replay of the failed stimulus attempts of the 1970s. As Gramlich found in his work on the antirecession grants to state and local governments: “A large share of the [grant] money seems likely to pad the surpluses of state and local governments, in which case there are no obvious macrostabilization benefits.”
The implication of our empirical research and Gramlich’s is not that the stimulus of 2009 was too small, but rather that such countercyclical programs are inherently limited. The lesson is to beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.
They have a great chart illustrating their point:
The whole piece is really worth reading, especially if, like me, you think macroeconomics and the whole multiplier debate is a battle between models and assumptions.
Good argument but it doesn't go far enough. The multiple is I expect about negative 0.15 because all those funds have to be administered: RFQs have to be written, proposals judged, external audits, etc. Once the additional staff are hired, you know they will be there till they retire.
Reply to this commentLinkReport AbuseRidiculous.
First, the money is coming from China or printed, not taken from the taxpayers. Second, taking money from under a taxpayer's mattress and using it to build a road creates ecomic growth.
The same reasoning could be used to say tax cuts create no growth. The government borrows money from the taxpayers in order to give them an equal-sized tax cut, resulting in no change to the economy.
Reply to this commentLinkReport AbuseBTW, states didn't reduce spending because of stimulus money. They reduced spending because revenue collapsed. They would have cut deeper were it not for the stimulus bill. And now that ARRA is expiring, they will be making much deeper cuts in 2011.
Reply to this commentLinkReport AbuseDid you read the article Revo? States weren’t taking ARRA funds and building roads, they were taking ARRA funds to shore up their budgets so that they would not incur more debt. In other words, the States were basically spending the same with ARRA that they would have without ARRA, so logically there could not be simulative effect from the same level of spending. The incurred debt was merely transferred from State coffers to the Federal - that’s ARRA’s dirty little secret that undercuts the Keynesian argument - even if you accept the Keynsian model!
Reply to this commentLinkReport AbuseWithout the stimulus grants to state governments, hundreds of thousands of workers employed by the government would have been laid off, and most of them probably would have trouble paying their bills and buying groceries, meaning the businesses in their area would have fewer customers, and they might have to lay people off as well.
Although, I heard a Republican say once that the government has never created a job, so I guess all those people were already unemployed anyway.
Reply to this commentLinkReport Abuse'The same reasoning could be used to say tax cuts create no growth. The government borrows money from the taxpayers in order to give them an equal-sized tax cut, resulting in no change to the economy."
NO. When taxes are cut, it is an admission by the government that it has taken too much of its citizens' money. In order to accept your position, all money must first belong to the government by which the government, through an act of benevolence, gives its people the right to keep its money. No sale. When government spends, it taxes and/or borrows. When it cut taxes, it should cut its appetite for spending and borrowing as well. Only spending adds to the deficit, and, if there is no revenues to pay for spending, the borrowing that is done is added to the debt.
"Without the stimulus grants to state governments, hundreds of thousands of workers employed by the government would have been laid off, and most of them probably would have trouble paying their bills and buying groceries, meaning the businesses in their area would have fewer customers, and they might have to lay people off as well."
It seems you didn't bother reading the article as well.
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