NCPA - National Center for Policy Analysis


June 11, 2010

Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798.  Economists were divided then about whether this spending was worth it, and they are just as divided now, says New York Times columnist David Brooks. 

  • The president's economists ran the numbers through their model and predicted that the stimulus package would create or save at least three million jobs.
  • John F. Cogan and John B. Taylor of Stanford and Tobias Cwik and Volker Wieland of the Goethe-University of Frankfurt argue that the White House methodology is archaic; their model suggests the stimulus will create about a half-million jobs.
  • Edward L. Glaeser of Harvard compared the change in employment in each state to the amount of stimulus money it has received; he found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.  

Over all, most economists seem to think the stimulus was a good idea, but there's a general acknowledgment that we know relatively little about the relationship between fiscal policy and job creation.  We are left, as Glaeser put it on the Times's Economix blog, "wading in ignorance." 

If the economists are divided about what just happened, the rest of the world is not divided about what should come next, says Brooks: 

  • Voters, business leaders and political leaders do not seem to think that the stimulus was such a smashing success that we should do it again, even with today's high unemployment.
  • They seem to see the fiscal floodgates wide open and that the private sector still only created a measly 41,000 jobs last month, which doesn't inspire confidence.
  • Furthermore, they understand something that is hard to quantify: Deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times.  

In times like these, deficit spending to pump up the economy doesn't make consumers feel more confident; it makes them feel more insecure because they see a political system out of control.  Deficit spending doesn't induce small businesspeople to hire and expand.  It scares them because they conclude the growth isn't real and they know big tax increases are on the horizon.   

Source: David Brooks, "Prune and Grow," New York Times, June 10, 2010. 


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