The Hoover Institution's John F. Cogan and John B. Taylor combed through state and federal spending data from the past few years looking for a multiplier effect from the stimulus. Instead, they found that purchasing increased very little at the federal level and not at all at the state level.
The ARRA attempted to stimulate government purchases in two ways. First, it provided funds to finance federal government purchases of goods and services; mainly for infrastructure, law enforcement and education. Second, it provided grants to states and local governments to enable them to increase purchases of similar goods and services.
Recently released Commerce Department data show that of the $862 billion stimulus package, the change in government purchases at the federal level has, thus far, been extremely small. From the first quarter of 2009 through the third quarter of 2010, government purchases have increased by only 3% of the $862 billion ($24 billion). Infrastructure spending increased by an even smaller amount: $4 billion. In a $14 trillion economy, these amounts are immaterial.
The Commerce Department also provides data on ARRA grants to state and local governments and the amount of purchases by these governments. According to these data, state and local government purchases of goods and services did not increase at all in response to the large federal stimulus grants. These purchases have remained slightly below their pre-ARRA level since the fourth quarter of 2008.
Meanwhile, state and local revenues fueled by the receipt of ARRA grants have grown by 10% over the same period. The low level of state and local purchases is consistent with the initial fall-off and subsequent slow growth in revenues excluding ARRA grants. Our statistical analysis shows that, once revenues are controlled for, ARRA grants have no statistically significant impact on state and local government purchases.
…So where did ARRA's state and local grant money go? While some of it increased transfer payments to individuals in the form of welfare and Medicaid, the major part was simply used to reduce borrowing. As ARRA grants increased, net borrowing by state and local governments decreased. In the third quarter of 2010, for example, state and local governments received $132 billion in stimulus grants at an annual rate. In that quarter they borrowed $136 billion less at an annualized rate than they had in the fourth quarter of 2008, even though their revenues from all other sources were only $76 billion higher.
It is becoming increasingly difficult to argue that the stimulus worked as intended. The evidence that stimulus backers have used to argue that it worked is not very convincing. The evidence that it failed to either energize the economy as planned or create long-term jobs, however, is mounting.