Why It Is So Hard to Figure Out What the Stimulus Did

February 26, 2014

It is difficult to estimate what the stimulus actually did, says Peter Suderman, senior editor at Reason Magazine.

The idea behind a stimulus is that it creates a multiplier effect, with every dollar of government spending producing more than a dollar's worth of economic gain.

  • For example, if the multiplier is 1.5, then $100 million in stimulus would create $150 million in economic gain.
  • But the problem is that economists do not at all agree as to what an appropriate multiplier is.
  • The Congressional Budget Office (CBO) has estimated the figure to be somewhere between 0.5 and 2.5.
  • With a multiplier below 1.0, the economic activity being generated is less than what was spent.

To measure the results of the stimulus, the CBO simply took the amount of money spent and then applied the multiplier to it. But that analysis says nothing about what the stimulus actually did. If the real-world effects were in fact completely different, the analysis would not have shown it.

Basically, it is an estimate of what the results of the stimulus might be if the uncertain multiplier estimates are actually correct. As such, it is hard to say what the stimulus actually accomplished. It is easier, however, to see what it did not accomplish.

  • The White House projected that unemployment without a stimulus would reach 9 percent in 2010 and remain steady. With the stimulus, they projected an unemployment peak in 2009, dropping to 6 percent afterwards.
  • In reality, unemployment rose higher and faster than was projected and, while it fell, it did not fall as rapidly as the White House estimated.

Even if the administration is correct -- that their estimates were made before they understood just how bad the recession was -- that only illustrates how difficult it is for lawmakers and advisers to diagnose economic problems, and that inability to diagnose problems does not inspire confidence in their proposed solutions. Is it really worth spending billions of dollars to intervene in the economy when the results of such intervention are so uncertain?

Source: Peter Suderman, "Why It's So Hard to Figure Out What the Stimulus Did," Reason Magazine, February 18, 2014.

 

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