Given that difficulty, the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact is to start with common sense.
When the government spends US$800 billion on such things as highway construction, salaries for teachers and policemen who were about to be laid off and so on, it has an effect. Workers who otherwise would not have a job now have one, and they might spend some of their income on goods and services produced by other people, creating a multiplier effect.
Those who claim that this spending does not boost income and employment (or that it causes harm) apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy or even that the same teacher finds a new job right away. Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual.
They also believe that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms.
However, interest rates are at rock-bottom levels — even lower than in January 2009 — while core inflation has slowed to a pace unseen since the early 1960s.
The conditions of the past four years — high unemployment, depressed output, low inflation and low interest rates — are precisely those for which traditional “Keynesian” remedies were designed.
Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach. The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects predicted by traditional Keynesian models.
Allowing for a wide range of uncertainty, the office estimates that the stimulus added between 1.5 percent and 3.5 percent to GDP by the fourth quarter, relative to where it otherwise would have been. The boost to GDP in 2010, when the peak effect of the stimulus kicked in, was roughly twice as great.
Of course, econometric models do not much interest most of the public. A turnaround needs to be visible to the naked eye to impress voters. Given this, one can only wonder why basic charts, such as the 2008 and 2009 “V” shape in growth and employment, have not been used — and reused — to make the case.
Jeffrey Frankel is a professor of capital formation and growth at Harvard University.
Copyright: Project Syndicate
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