The Obama Stimulus Impact? Zero

December 10, 2010 09:22

“The general idea of stimulating the economy through state and local governments is probably not a very good one. Plain old permanent federal income tax cuts retain their superiority as a fiscal stabilization device.”- Ned Gramlich former Fed board governor

by John F. Cogan and John B. Taylor at The Hoover Institute

In September 2009, we reported on this page empirical research showing that the temporary tax rebates and transfer payments in the Bush and Obama administration’s stimulus programs were ineffective. Here we consider new data on the impact of increases in government purchases, which were heralded as a major stimulating factor in the Obama package.

The key tenet of Keynesian economics is that government purchases of goods and services stimulate additional economic activity beyond the amount of the purchase itself. The impact on GDP of the stimulus depends both on the dollar volume of additional government purchases and on the size of the government purchases multiplier, i.e., the effect of a change in government purchases on real GDP.

Although the policy debate has mainly focused on the multiplier’s size, data covering the first year and three quarters of the 2009 American Recovery and Reinvestment Act (ARRA) show that, despite the large size of the program, the dollar volume of additional government purchases that it has generated has been negligible.


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