From John B. Taylor:
In sum, this empirical examination of the direct effects of the three countercyclical stimulus packages of the 2000s indicates that they did not have a positive effect on consumption and government purchases, and thus did not counter the decline in investment during the recessions as the basic Keynesian textbook model would suggest. Individuals and families largely saved the transfers and tax rebates. The federal government increased purchases, but by only an immaterial amount. State and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers.
Some argue that the economy would have been worse off without these stimulus packages, but the results do not support that view. According to the empirical estimates of the impact of ARRA, if there had been no temporary stimulus payments to individuals or families, their total consumption would have been about the same. And if there had been no ARRA grants to states and localities, their total expenditures would have been about the same. The counterfactual simulations show that the ARRA-induced decline in state and local government purchases was larger than the increase in federal government purchases due to ARRA. In terms of the simple example of Model A versus Model B presented above, these results are evidence against the views represented by Model A, and thus against using such models to show that things would have been worse.
Others argue that the stimulus was too small, but the results do not lend support to that view either. Using the estimated equations, a counterfactual simulation of a larger stimulus package—with the proportions going to state and local grants, federal purchases, and transfers to individual the same as in ARRA—would show little change in government purchases or consumption, as the temporary funds would be largely saved. Of course, the story would be different for a stimulus program designed more effectively to increase purchases, but it is not clear that such a program would be politically or operationally feasible.
More generally, the results from the 2000s experience raise considerable doubts about the efficacy of temporary discretionary countercyclical fiscal policy in practice. In this regard the experience with the stimulus packages of the 2000s adds more weight to the position reached more than 30 years ago by Lucas and Sargent (1978) and Gramlich (1978, 1979).
Note that this finding is not an indictment of Keynesian theory but of political practice. It’s completely consistent with Keynesian theory: if government deficit spending does not result in an increase in net borrowing, there is no increase in aggregate demand and, hence, no stimulus. It’s merely taking money out of one pocket and putting it in the other.
Further, I would suggest that the very decentralized form of government that prevails in the United States make it very much more difficult to coordinate spending than it would be in, say, the United Kingdom, China, or France and this tends to make Keynesian strategies less effective here than they might be elsewhere
Why does Taylor’s analysis carry more weight than the CBO’s, CEA’s. Macroeconomic Advisors, Moody’s, etc. which showed the ARRA had significant effects. Absent a control, it is all best guesswork.
Steve
Because they explicitly derived their results from looking exclusively at inputs.
Wait,
By this logic, isn’t the counter-factual even less spending?
I’ve long held that the “hole” was much bigger than the stimulus, and therefore the results were not dramatic. But (and for that reason) I see it as a math fail to say that they didn’t create any jobs.
If the ARRA just partially filled the hole in aggregate demand, then it only helped some, not all.
(One of the other observations I made was that many of these programs were intended to “deflect the curve” rather than “find a bottom.” Mr. Taylor would have to use some other math (impossible math) to prove that the ultimate unemployment would have been as low, sans ARRA .)
Cf. Dr. Taylor’s explanatory post
I’m relying on something much simpler than Dr. Taylor’s models and counter-models.
I’m relying on the common sense that spending something is spending more than spending nothing.
Not, if I’m spending your money, and some of it is “lost” in the transition. If I’m spending your money, then you are spending less. Factor in that some maybe “lost”–deadweight loss–then we are spending less.
Now the idea behind the Keynesian stimulus is that we borrow and spend just as much as we did before, plus the borrowed money as well. But spending from “current” dollars is reduced to offset the borrowed spending, then on net there is no change and no stimulus.
Further, except in cases where credit markets are working extremely efficiently we could possibly be worse off even if people are saving all of that reduction in current spending (not likely as some people are seeing a reduction in incomes) if the interest rate on savings is lower than the interest rate on what was borrowed.
The best argument you can put forth at this point is the following:
Absent the spending things would have been worse. That is, with the stimulus we spent more than without it, but it wasn’t enough to keep unemployment from rising.
But this is mere assertion without more behind it. And whether or not it translates into an improvement over doing nothing is not addressed by the above position. In fact, there are number of reasons to think it hasn’t helped nearly as much. Sure it might have mitigated some of the immediate pain, but consider the following:
1. Zombie banks have been left in place–i.e. we still have in place the problem that lead to our economic situation.
2. We are allocating resources towards industries that are probably going extinct (e.g. GM), this may very well be wasteful in that it is diverting resources away from whatever areas might provide future growth.*
3. We have seen a rise in national debt that we’ve only seen once before–WWII. The problem with this is that we aren’t in a situation like at the end of WWII where the outlook for the economy was much more positive. Also add on Rogoff and Reinhart’s research on this and we can expect lower growth rates for quite some time (e.g. Japan) which means reducing unemployment is going to take quite a bit longer.
Did the stimulus achieve its stated goals? No. It did not “jump start” the economy. It did not keep unemployment from going over 7 to 7.5%. Did it keep things from going really bad? Maybe, but was the cost worth it? If we end up with 10+ years of crappy Japanese style growth, and skyrocketing health care costs the answer is quite likely to be, “No.”
*Yeah, I know you are going to say, “Well what are these areas?” I don’t know. And if I didn’t I wouldn’t tell anyone here, I’d quietly invest in them and laugh at the rest of you.