NCPA - National Center for Policy Analysis

What Stimulus?

January 31, 2011

A new report from Stanford University economists John Cogan and John Taylor says, "There was little if any net stimulus," resulting from President Obama's $862 billion package.

Worse, say the authors, the White House should have known it would not work.  "The irony," they write, "is that basic economic theory and practical experience predicted this would happen."

But why the stimulus didn't work is a little more complex.  The authors break down the three kinds of Keynesian stimulus packages.

  • In one, government gives money to consumers and hopes they spend it.
  • In another, the federal government directly buys goods and services, ranging from computers to building infrastructure.
  • In the third, government hands money to state and local governments to spend.

The $862 billion stimulus package passed by Congress and signed into law by the president tried to do all three things.  Unfortunately, none of them worked, says Investor's Business Daily.

  • In the case of money handed over to consumers, "It went to pay down some debt or was simply saved rather than spent on consumption."
  • At the federal level, the stimulus generated just $20 billion in added government purchases, about 3 present of the total spent;of that amount, only $4 billion was spent on infrastructure.
  • Then there were the grants to state and local governments, which were expected to get local economies revving again, but were unsuccessful, according to Cogan and Taylor.

Source: "The Economic Stimulus That Wasn't," Investor's Business Daily, January 25, 2011.

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