Failure of the Stimulus

Economist John Taylor sums up why the stimulus had little effect on the economy. (H/T The Grumpy Economist, John H. Cochrane.)

In the case of the 2009 stimulus package, there was also an attempt to increase significantly government purchases of goods and services. But the evidence is that this attempt largely failed. A special satellite account produced by the Bureau of Economic Analysis shows that federal infrastructure investment—at the peak quarter—increased by only .05 percent of GDP as a result of the stimulus and federal government consumption by only .14 percent.

While state and local governments received substantial grants under the 2009 stimulus, a statistical analysis by John Cogan and me shows that they did not use these grants to increase their purchases of goods and services as many had predicted. Instead they reduced net borrowing and increased transfer payments. Even with balanced budget laws, state and local governments can borrow for infrastructure, and they borrowed less on a net basis during the stimulus period, while they put additional funds into financial assets.

So there you have it, all we have to show for the stimulus is a huge increase in federal debt, which the states chose to spend reducing borrowing and using the money to pay for welfare, unemployment or other transfers. The federal government's own bureaucracy is the main reason it can't spend. Even if you give money to one agency to spend, two others, one of them being the EPA will prevent the spending. By the way, people who received one time tax rebates also didn't spend the money, but reduced debt or increased savings. All the stimulus did was to shift money around in the economy, but certainly it did not change aggregate demand as is claimed by the administration.