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A very interesting piece on the whole stymulus situation...
Where Did the Stimulus Go?
Where Did the Stimulus Go?
During the recent recession, the U.S. Congress passed two large economic stimulus programs. President Bush’s February 2008 program totaled $152 billion. President Obama’s bill, enacted a year later, was considerably larger at $862 billion. Neither worked. After more than three years since the crisis flared up, unemployment is still very high and economic growth is weak...
In the 2008 stimulus, the U.S. Treasury began issuing one-time payments to households in the spring. This temporary boost in income was designed to jump-start personal consumption of goods and services and thereby increase production and jobs at the firms that produce those goods and services. It didn’t work...
This should not have surprised anyone. Long ago, the Nobel Prize–winning economists Milton Friedman and Franco Modigliani explained that individuals do not increase consumption much when their income increases temporarily. Instead, they save most of the funds or use the money to pay back some of their outstanding debts...
Despite the large size of the 2009 act, the change in federal-government purchases it has generated has been remarkably small. Thus far, such purchases have increased by $20 billion, or only 3 percent of the $862 billion spent. Of that $20 billion, only $4 billion has been devoted to infrastructure projects. Compared to GDP, the expenditures are even smaller. Federal infrastructure spending due to the 2009 act was only .04 percent of GDP in the most recent quarter. The stimulus money went elsewhere...
Federal grants, which began to flow in the first quarter of 2009, dampened the initial revenue decline and then caused total revenues to grow. By the third quarter of 2010, state- and local-government revenue,s including the act grants, were 10 percent higher than they had been in the fourth quarter of 2008.
And what of state- and local-government purchases? Well, they declined with the initial reduction in revenues—and despite the addition of those $170 billion in ARRA grants, remained at this lower level throughout...
To sum up: the federal government borrowed funds that it mainly sent to households and to state and local governments. Only an immaterial amount was used for federal purchases of goods and services. The borrowed funds were mainly used by households and state and local governments to reduce their own borrowing. In effect, the increased net borrowing at the federal level was matched by reduced net borrowing by households and state and local governments.
So there was little if any net stimulus. The irony is that basic economic theory and practical experience predicted this would happen. If policymakers had only remembered what Milton Friedman, Franco Modigliani, and Ned Gramlich had said, we might have avoided these two extremely costly policy failures.