The Corner

On the Effectiveness of Stimulus Spending

On Wednesday, the Senate Budget Committee had yet another hearing about whether the stimulus packages and other federal interventions have been effective. On one side, we had Senator Conrad, Mark Zandi, and Alan Blinder. (I expressed some reservations about Zandi and Blinder’s work here.) On the other side, we had Sen. Judd Greg and economist John Taylor.

Taylor’s testimony was interesting: First, he noted that, contrary to the claims made, changes in economic growth have not been correlated to changes in government purchases:

Consider the government purchases part of the stimulus package of 2009, also designed to stimulate economic growth. An examination of what actually happened indicates that such purchases had little to do with the recovery in economic activity, and they have not prevented the recent slowdown. Data from the Bureau of Economic Analysis provide the evidence: Changes in government purchases did not correlate with the changes in economic growth from recession to recovery. On the contrary, most of the recovery last year has been due to investment — including inventory investment — and has little to do with the discretionary stimulus package.

Second, he said, “Only $2.4 billion of the $862 billion in the 2009 stimulus package (ARRA) has been spent on federal infrastructure — three-tenths of a percent. More may have resulted at the state and local level, but there is no clear connection between the federal grants and such spending.” He continues by asking:

How can the contributions of the change in government purchases be so small given that the stimulus was $862 billion? One reason is that the part of the package explicitly devoted to federal purchases of goods and services was quite small. In fact, of the $862 billion package, the amount of government purchases at the federal level was $7.9 billion in 2009 and $10.5 in the first half of 2010 according to the Bureau of Economic Analysis. Focusing on infrastructure spending (gross investment) at the federal level the amount was even smaller: $.9 billion in 2009 and $1.5 billion in the first two quarters of 2010. Thus, of the total $862 billion only 3 tenths of a percent has been on federal infrastructure projects.

So much for spending on shovel-ready projects (as is obvious here) and for government spending triggering economic growth.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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