Advancing a Free Society

More Evidence on Why the Stimulus Didn’t Work

Saturday, October 30, 2010

Polls show that most Americans don't believe that the stimulus package worked, but debate continues among economists. The most debated issue is the size of government purchases multiplier. Suppose that the government purchases multiplier is 1.5. Then Economics 1 students learn that the change in GDP due to an increase in government purchases is found by multiplying the change in government purchases by 1.5. That is:

change in GDP =1.5 times change in government purchases

Government purchases include spending on items such as infrastructure, law enforcement, and education, but do not include interest and transfer payments. (A derivation is in Ch. 23 appendix of the Taylor-Weerapana principles text.)

The example of 1.5 is at the upper range of estimates, and was used in a paper by Christina Romer and Jared Bernstein to estimate the impact of the American Recovery and Reinvestment Act of 2009 (ARRA). However, John Cogan, Volker Wieland, Tobias Cwik, and I found that the multiplier in the case of ARRA was much smaller, around .7. Robert Barro argues that it is zero. So there is debate.

Continue reading John Taylor at Economics One

(photo credit: Dean Walton)