Fiscal Stimulus

Topics: American Recovery and Reinvestment Act of 2009, Monetary policy, Keynesian economics Pages: 3 (1217 words) Published: April 8, 2013
The Fiscal Stimulus, Flawed but Valuable
But I’m also an empirical economist who’s spent a career trying to estimate the effects of monetary and fiscal policy. So let me put on my empiricist’s hat and evaluate what we know about the legislation’s effects. After listening to Representative Paul Ryan in the vice-presidential debate, you might think that careful evaluation isn’t needed. In his view, we spent $800 billion on the stimulus, yet unemployment still rose to 10 percent — so obviously it wasn’t helpful. To understand what’s wrong with that reasoning, think of someone who’s been in a terrible accident and has massive internal bleeding. After lifesaving surgery, the patient still feels rotten. But we shouldn’t conclude from this lingering pain that the surgery was useless — because without it, the patient would have died. Without knowing where the economy was headed in the absence of the stimulus, it’s impossible to judge what it contributed just from what happened afterward. That’s why empirical economists rely on other approaches. One is to look at history. The stimulus legislation, technically known as the American Recovery and Reinvestment Act of 2009, was a mixture of tax cuts for families and businesses; increased transfer payments, like unemployment insurance; and increased direct government spending, like infrastructure investment. A growing literature examines the effects of such tax cuts and increases in government spending over history and across countries, and the overwhelming conclusion is that fiscal stimulus raises employment and output in the near term. When the Congressional Budget Office or leading private forecasters assess what the Recovery Act contributed, they use these estimates from history. They multiply the amounts of different types of stimulus in the act by their usual historical effects. This method suggests that at its peak, the act raised employment by about 1 million to 3 1/2 million jobs, compared with what would have...
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