Politics

Why the Stimulus Tanked: Untimely, Untargeted, Untemporary

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Over at U.S. News & World Report, Reason columnist and Mercatus Center economist Veronique de Rugy explains why the stimulus failed to stimulate.

As part of her wind-up, she notes that a recent study by one of her colleagues found "the median multiplier in relevant studies is 0.87, far lower than the administration's claim that every stimulus dollar would produce $1.57 worth of activity." Which is to say, there's little evidence to suggest that the multiplier theory has a purchase on anything other than the taxpayers' purse.[*]

Then there's the design of Obama's stimulus (and Bush's before that). Under Keynesian theory, stimulus spending should be timely, targeted, and temporary. And it should be aimed ultimately at increasing private investment. What did we get instead? Bailouts of the public sector in the form of large cash grants to states. But

states chose to use the money to close their budget gaps. This choice meant that the money went to keeping school teachers in their jobs and paying public sector workers, rather than to creating jobs in the private sector. Furthermore, the spending wasn't timely: Three years after the law was adopted, some programs still have managed to spend only 60 percent of the appropriated funds. Not only was the spending poorly timed, it also wasn't targeted. The data show that stimulus moneywasn't targeted to those areas with the highest rate of unemployment. In fact, a majority of the spending was used to poach workers from existing jobs in firms where they might not be replaced. Finally, a review of historical stimulus efforts shows that temporary stimulus spending tends to linger. Two years after the initial stimulus, 95 percent of the new spending becomes permanent.

And here's the kicker: Increases in federal spending have a negative effect on how businessess spend, with the latter clenching up when more tax money floods an area.

More here.

[*]: I bolded that for emphasis, as there seems to be some confusion as to whether I was suggesting that stimulus spending might have worked if it had been applied differently. The short answer is: No, I don't think so, because the multiplier is likely to be less than 1, meaning that the dollars spent suck more out of an economy than they put in.