As noted earlier, my Bloomberg View column argues that there is good reason to doubt that the stimulus did much to help the economy. Over at Business Insider, Joe Weisenthal claims my argument “fails disastrously.” He doesn’t defend the pro-stimulus studies I critique. Nor does he adduce any other pro-stimulus studies I missed. His affirmative case for the stimulus boils down to one study, noted by me, that found that the stimulus increased public-sector employment but not private-sector employment (which Obama, incidentally, said that the stimulus would increase).
He then makes two counter-arguments against my skepticism. I note a study by John Cogan and John Taylor that found that federal aid to states led the states to borrow less, and say that “shifting debt from states to the federal government cannot have been stimulative.” Weisenthal responds, “It absolutely can be! There’s the obvious fact that the Federal Government borrows for less than states can, ergo, you’re saving money by essentially refying state debt that way.” No. That’s an argument for the proposition that having the federal government borrow to reduce state indebtedness is a good idea. It’s not an argument that the maneuver works as a Keynesian stimulus. The theory doesn’t have anything to do with saving money on future interest payments.
Weisenthal misunderstands my point about the Federal Reserve. I ask readers to do a short thought experiment to illustrate how the Fed can limit the efficacy of legislative stimulus. If the Fed had a 2 percent inflation target and hit it every time, such legislation could not possibly stimulate. This is also true if the Fed had an NGDP target that it hit every time. Weisenthal seems to think that I imagine that the Fed does, in fact, have a 2 percent inflation target and hit it every time. I don’t. You can relax the assumption I used in my illustration. But it remains true that the Fed’s desire to keep inflation in a narrow band “limits the potential effect of any fiscal policy on the performance of the economy.” Which is exactly what I said; hence the quotation marks.
My argument is that with less or no legislative stimulus, the Fed would have done more to prevent deflation, and we would thus have ended up with an economy of roughly the same size but with less federal debt. (The Fed could have lowered its interest on reserves, for example.) Weisenthal counters that the Fed did nothing to counter or undercut the stimulus but instead ran an expansionary policy. I disagree with the conventional view that money has been loose, but even if Weisenthal’s characterization is accurate it doesn’t matter. It could have been looser, and likely would have been in the absence of the stimulus bill. Weisenthal seems to think that there’s no causal relationship unless Bernanke announces, “Now that stimulus has passed I’m going to expand the money supply less than I otherwise would have.” That’s not a good argument.