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What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package

Much of the recent economic debate about the impact of stimulus packages has focused on the size of the crucial government purchases multiplier.  But equally crucial is the size of the government purchases multiplicand–the change in government purchases of goods and services that the multiplier actually multiplies.  Using new data from the Bureau of Economic Analysis and considering developments at both the federal and the state and local level, we find that the government purchases multiplicand through the 2nd quarter of 2010 has been only 2 percent of the $862 billion American Recovery and Reinvestment Act (ARRA) of 2009.  This increase in government purchases has occurred mainly at the federal level.  While states and localities received substantial grants under ARRA, state and local governments have not increased their purchases of goods and services.

Instead they reduced borrowing and increased transfer payments.

These findings explain why, regardless of the size of a government purchases multiplier, changes in government purchases have had no material effect on the growth of GDP since the time ARRA was enacted.

The implication is not that ARRA has been too small, but rather that it failed to increase government consumption expenditures and infrastructure spending as many had predicted from such a large package.  A consideration of the counterfactual event that there had not been an ARRA supports the hypothesis that state and local government borrowing would have been higher and purchases would have been about the same in the absence of ARRA.

This was by John F. Cogan and John B. Taylor. But I guess since they have a Chicago-bent, that these are all lies and distortions. I already can imagine the retort: the purpose of ARRA was not to increase state and local spending, but to keep them afloat during the crucial time. In other words, there is no evidence that can ever be used to suggest that the stimulus was a failure. None. I cannot claim to be an expert, but I would simply like to see a supporter of stimulus point to data that one COULD come up with that might be used to persuade them otherwise. Since none such recommendation is forthcoming, my dear readers will have to be content with the left’s proclamations that (in the words of Lord Chuck Schumer, “we avoided the Great Depression” and “unemployment would have been 12% of more” were it not for ARRA or the left’s ignorance of the findings from above, and the inconvenient fact that virtually none of the stimulus money was even spent by the time the “recession” formally ended.

By the way I do not disagree with states paying down debt (especially if credit markets were frozen). But that is not the point of the paper. Funny that the reason government spending was “preferred” to “tax cuts”was the purported evidence that consumers save all the money and pay down debt (and therefore do not stimulate the economy), and that governments do not do the same thing. This does not mean that sending funds to states was not a good idea, but it does mean that citing it as stimulative, is, well, not quite right.


3 Responses to “And in Today’s Stimulus News”

  1. Harry says:

    You do not understand, Mike. Government can spend your money more wisely, than you or any other hick from upstate New York.

    You make a good point about paying down debt, but then the debt was created by spending on road crews who were ten percent productive, and they could be at the top of the class. What is the productivity of a state employee whose job is to dream up negative projects where there is no one digging and seven guys watching?

    It is reassuring to read that an economics expert questions wheteher the effect of the stimulus is measurable. In that regard, I will concede a degree of imprecision about supply-side claims.

  2. jb says:

    Sorry for my obtuseness Wintercow, but if I have this straight… by way of analogy, consider the multiplier as it applies to fractional reserve banking. Is it fair to say that what is claimed to be going on with respect to fiscal stimulus is akin to applying the money multiplier to deposits that don’t exist?

  3. wintercow20 says:

    I’d argue a little different. It’s like applying the multiplier to deposits that DO exist, but that have come in the form of cash balance increases.

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