The Corner

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The Stimulus Bill’s Effectiveness: Zero


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.