One Year Later and More Evidence that the Stimulus is Not Working

Friday’s data release from the Bureau of Economic Analysis (BEA) shows that real GDP growth rebounded to 5.7 percent in the fourth quarter from 2.2 percent in the third quarter of last year. The rebound was sharper when compared with the -6.4 percent decline in the first quarter and -0.7 percent decline in the second quarter.

How much of the rebound was due to the “stimulus package” passed in February of last year? I have shown in a previous post that the increased transfer payments to individuals and temporary tax rebates had virtually no impact in jump-starting consumption. But what about the increase in government purchases in the stimulus package? A look at the details in the GDP report of Friday shows that changes in government purchases have had virtually no effect. The turn-around in growth has been mainly due to private investment. Four simple graphs illustrate this.

Recall that that GDP is the sum of Consumption plus Investment plus Net Exports plus Government Purchases. Thus the growth of GDP can be decomposed into contributions due to each of these four components. Table 2 of the BEA data release reports these contributions, and I summarize them in the four charts. In each chart the blue line shows the growth rate of real GDP from the start of the recession. You can clearly see the decline in growth in the recession and then the start of the rebound. In the first chart the red line shows the contribution from investment. It explains most of the recession and the rebound.

In the next chart you see the contribution of consumption, which plays a noticeable but considerably smaller role.

The third chart shows the contribution of net exports, which explains some of the smaller movements in early 2008.

The fourth chart shows the contribution of government purchases. I have focused on non-defense federal plus state and local purchases because defense spending was not part of the stimulus (adding in defense does not change the story). Note that none of the action in real GDP growth is due to government purchases.

In other words during the entire first year of the stimulus package, the contribution of government purchases to change in real GDP growth is virtually nil. There is no evidence here that the stimulus has worked either to raise GDP growth or to create jobs.

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

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1 Comment on One Year Later and More Evidence that the Stimulus is Not Working

  1. Thanks John. What I don’t understand is where has all the stimulus money gone that did not go into direct Government purchases? Where is the money from cash for clunkers – I’d assume that it should show up in consumption. What about grants or loans for alternative energy boondoggles – is it in Gov’t spending or in private sector investment. Where did all that money go? Has it even gone yet, or are they just talking about it? Where is all the bank bailout money?

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