Arnold Kling  

The Stimulus and the Economy

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John Taylor cuts through the BS.


the latest Department of Commerce estimates of ... the improvement in GDP growth from the first to second quarter. Growth improved by 5.7 percent (from -6.4 percent to -0.7 percent). Private investment was by far the major source. Government spending contributed 1.9 percentage points, but more than half of that was defense spending which was not part of the stimulus. ...This one-page brief provides more details and also shows that direct spending from the stimulus contributed only 0.3 percent of 5.7 percent.


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COMMENTS (7 to date)
Yancey Ward writes:

Doesn't matter. Stimulus proponents always fall back on the stimulus being responsible for the increased confidence exhibited by the private sector.

MikeDC writes:

It seems to me that'd be easily determined by surveys of opinion on the stimulus. Anyone asking that stuff?

Anyway, won't this show the stimulus is more responsible for growth as stimulus money is actually spent (over the next year).

frankcross writes:

Seems odd. Leaves out tax cuts and rebates and assumes no multiplier effect if I read it correctly.

I'd like an explanation of why Moody's, Goldman, CEA, CBO, Morgan Stanley and others have found much larger effects.

Menzie Chinn writes:

With all due respect, the assertion that the stimulus does not include defense expenditures is incorrect; see CRS. See also specific numbers at this list at Recovery.gov. I suggest reference to numbers reported by CEA, discussed here, would be helpful.

Daniel Kuehn writes:

I agree with frankcross. This was a particularly disappointing post by John Taylor and I'm equally disappointed that you reposted it.

1. Any stimulus proponent will tell you that theory suggests the stimulus should crowd in private investment. Taylor makes no effort to determine how much of private investment is due to this effect, thus assuming his own conclusions.

2. He only adds up the government spending and assumes that's the impact - he doesn't count any consumption spending towards the stimulus as a result of the multiplier. Not that anyone really could apportion any of the consumer spending to the stimulus right now - it's too early to do that - but again, by not counting it at all he's assuming his own conclusions - he's implicitly assuming a multiplier of 1.

3. And of course, as he got into in the attached note we're only talking about tens of billions of dollars in GDP. At that rate, any stimulus advocate would say the impact is small. Talking in gross impact, therefore, is rather unhelpful. He should be talking in multipliers - bang for the buck. But as I pointed out above - he's implicitly assuming a multiplier of 1.

Not a shining moment for John Taylor. I like what he's had to say about the Fed better.

Doc Merlin writes:

Daniel, seems you are arguing past each other.

John is basically arguing a small (much less than 1) multiplier and you are arguing a (larger than 1) multiplier.

Daniel Kuehn writes:

No, Doc. What Taylor is doing is making assumptions that guarantee a 1 multiplier. The question should be "is any private investment or consumption attributable to the stimulus?", but that's not the question he asks.

Let me put it this way - given the priors he lays out, exactly how would you falsify a multiplier of one? It's impossible. He essentially counts up government spending's contribution to the change in GDP and calls that the effect of the stimulus. Why does he just declare that?

If he wants to convince anyone that isn't already on his side he has to provide a better reason for claiming that none of the investment or consumption is due to the stimulus, rather than just declaring it as such.

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