Many economists and others in the US are advocating a second fiscal stimulus program, believing that the close to $1 trillion in the Obama stimulus package was too modest. This call for another round of government spending is taking place despite the fact that about one third of the original package has not yet been spent, even though it is more than one and one half years since the package was signed by President Obama. Moreover, skeptics (including myself) about whether the US needs another spending package point out that leading economists in the President’s Council of Economic Advisers were far too optimistic about the effects of a big stimulus on unemployment rates. Instead of a predicted decline in unemployment due to the stimulus of more than 1½ percentage points, the total fall in seasonally adjusted unemployment has been only ½ of a percentage point from its peak of 10.2 percent.
Of course, perhaps other factors, such as the uncertainty about the business environment that Congress and the President created through their rhetoric, and also through their actual and proposed legislation, offset powerful effects of the fiscal stimulus itself in reducing unemployment. The unpleasant fact we economists have to face is that there is not strong evidence on the actual effects of governmental spending on employment and GDP. The usual claimed effects are generally based on predictions from highly imperfect theoretical models of the economy rather than from strong direct and clear evidence on the employment consequences of different fiscal stimuli.
(photo credit: The Prime Minister's Office)