The stimulus evidence one year on

Last week the Wall Street Journal reported a piece that analyzes whether the Obama stimulus plan, after one year’s time, can be judged a success. (See The Stimulus Evidence One Year On)

Robert J. Barro, who is professor of economics at Harvard University and a senior fellow at Stanford University’s Hoover Institution, writes that the stimulus may be a good deal in the short run — if the government spends on things that are truly worthwhile. As we’ve seen, that is not always the case.

But Barro says, correctly, that this spending, paid for with borrowed money as it is, generates debt that must be repaid at some time. This is something that government spending advocates seem to conveniently forget.

Barro comes to this conclusion:

We can now put the elements together to form a “five-year plan” from 2009 to 2013. The path of incremental government outlays over the five years in billions of dollars is +300, +300, 0, 0, 0, which adds up to +600. The path for GDP is +120, +180, +60, minus 330, minus 330, adding up to minus 300. GDP falls overall because the famous “balanced-budget multiplier” — the response of GDP when government spending and taxes rise together — is negative. This result accords with the familiar pattern whereby countries with larger public sectors tend to grow slower over the long term.

The projected effect on other parts of GDP (consumer expenditure, private investment, net exports) is minus 180, minus 120, +60, minus 330, minus 330, which adds up to minus 900. Thus, viewed over five years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.

The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.

One thought on “The stimulus evidence one year on”

  1. The alleged “stimulus” is a fiasco. The “stimulus,” or should I say “porkulus” did not help the economy.

    The porkulus bill was supposed to keep unemployment from exceeding 8%. Today it is about 25% higher than that at 10 percent. If you use a broader definition of unemployment, the figure is a lot higher.

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