David R. Henderson  

The Stimulus Worked, Kind of

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Thoughts on Finance... Labeling the Ridiculous...

As Arnold Kling has already pointed out, my Hoover colleagues John Cogan and John Taylor have an op/ed in today's Wall Street Journal (or look here on John Taylor's blog) pointing out that the state and local governments that got a huge portion of the Obama stimulus bill used virtually all of it (by their measure, at least) to avoid going into further debt. It's always hard to conduct a counterfactual--how much extra debt would these governments have taken on had they not got the stimulus funds? But Cogan and Taylor do, I think, a reasonable job on that counterfactual.

They use this evidence to say that the stimulus program failed. Why? Because it didn't result in much, if any, new spending by local governments on goods and services. Instead, dollar for dollar, it restrained debt.

So why my title of this post? Why do I say stimulus worked? Because I don't judge it by Keynesian criteria. I judge it by efficiency criteria. I think of state and local (and federal) government spending as a gigantic machine that takes in value at one end and spits out lower value at the other. Sometimes it spits out negative value: think of a local government using its money to hire police to bust people for engaging in peaceful activities--such as growing or smoking marijuana. So, if we believe Cogan's and Taylor's numbers, the stimulus worked in the sense that it didn't create further destruction.

For more on government spending creating jobs that destroy wealth, see my section on the TSA in my article, "GDP Fetishism."


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CATEGORIES: Fiscal Policy



COMMENTS (7 to date)
Doc Merlin writes:

The TSA was what the dems wanted as part of the compromise that created the Homeland Security Agency (what the GOP wanted)... so I wouldn't describe it as GOP fetishism. It was also the GOP that inserted the opt-out provision that allows airports to do their own screening instead.

David R. Henderson writes:

@Doc Merlin,
I wouldn't describe it as GOP fetishism either. Nor did I.

Randy writes:

Re; "GDP Fetishism". Excellent! I hadn't seen the article before, so thanks for the pointer.

David R. Henderson writes:

Thanks, Randy, and you're welcome.

Hyena writes:

I hold out hope that declining birth rates and increased leisure expenditures will start driving politicians to abandon GDP in favor of other measures of well-being.

Japan should probably abandon GDP as a measure now; it would be much more profitable to look at something else because even with the best policies, they face an uphill battle against declining birth rates.

I wonder, also, if it wouldn't lead to better policy outcomes. The switch would change the focus of "national greatness" pressure on the public psyche.

Floccina writes:

So should we all be buying municipal bonds?

Mike Rulle writes:

I believe you made an opportunity cost version of the broken window fallacy (kind of!). Were there no stimulus money given to the states, perhaps they would have been forced to reduce spending further rather than merely borrow less.

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