WAS THE STIMULUS TOO SMALL?

January 31, 2011 at 12:39 PM · Economics

WAS THE STIMULUS TOO SMALL? I am a Keynesian, and I think that the stimulus packages to deal with what now seems to be called the Great Recession are being unfairly judged as a test of Keynesianism —and as a basis for rejection of Keynesianism. I think that the stimulus was too small. I was pleased to see this article by John F. Cogan and John B. Taylor, which analyzes the stimulus packages in Keynesian terms. First, Cogan and Taylor argue that the stimulus from temporary tax cuts was smaller than their size would suggest; it is a well-established Keynesian finding 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.” Second, because of the slowness of the federal expenditure process, “Despite the large size of the 2009 act, the change in federal-government purchases it has generated has been remarkably small.” Third, “federal stimulus grants to state and local governments had little effect on their purchases of goods and services.” In each case, the effect of the stimulus was less than the number attached to the stimulus—the effect on the deficit—would suggest.

4 comments

Dick Weisfelder February 2, 2011 at 11:42 AM

But the cutbacks states now face as the stimulus ends suggest how much the many public employees, soon to be laid off, spent.

Philip February 2, 2011 at 1:59 PM

I think that consumers, including state employees, were more likely to save than spend than in other downturns because of the great uncertainty caused by a financial crisis which threatened major institutions—household names. But to the extent more was saved or not spent, the stimulus should have been all the bigger. I have seen suggestions that it should have been twice as big.

Dick Weisfelder February 3, 2011 at 5:25 PM

My point was that if there had been no stimulus funding for states, local governments and boards of education, these employees would have been laid off two years ago. They would have added to the masses draining resources from unemployment programs and spending less. The stimulus paid their salaries and kept them working and spending whether they saved a bit more or not due to greater economic risks. Now a host of them will be sacked, not because the stimulus was initially too small, but because it is ending too soon.

Philip February 3, 2011 at 5:49 PM

I agree. The stimulus was too small and too delayed (expenditures two years later are not the same thing as an immediate stimulus.) And more stimulus is needed going forward. There’s an easy, rough way to judge the need for stimulus—the unemployment rate, which has been high throughout this period and continues high. As it is, the official unemployment rate substantially understates the level of unused people and other resources.