Gross and Net Fiscal Stimulus

There are two debates about the effectiveness of the 2009 and prior fiscal stimulus at the Federal level: one economic and the other political. Leaving aside the latter, as much political debate is not very well informed, let’s take a look at the former. Several recent research papers suggest that the Federal stimulus has been largely offset by state and local contraction, in effect a shifting of expenditure from governmental units which are constrained by budgetary deficit prohibitions, to those which are not so constrained.

Baker and Deutsch find that the net stimulus amounts to less than 1% of GDP, which is similar to the conclusion of Aizenman and Pasricha. This supports the claims that through fiscal policy, the US has expanded its debt to little economic effect. There is considerable debate about where we go from here, with economists like Brad DeLong advocating for larger stimulus, and others advocating for sizable tax cuts. I’m partial to the latter, but have to admit, if the tax cuts don’t increase aggregate demand, and instead go into balance sheet repair (increasing savings and/or paying down private debt), not much stimulation will be accomplished.

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