Has the Stimulus Been Effective?

Question: I read Robert Barro’s analysis of the net effectiveness of stimulus spending recently in the Wall Street Journal and clearly he concludes it’s not. Why is there not more public debate about this? What’s not being said?

Paul Solman: I’m not about to tussle publicly or privately with Robert Barro about macroeconomic models. Let me only say that after 33 years on the economics beat, I view them with a dash of skepticism. (Understatement never hurts.)

Here’s the justification for the stimulus package: Without it, we’d be in worse shape for a long a painful period of time. Robert Skidelsky put the matter much better than I ever could in our interview with him in December. Russ Roberts made the counter-case.

The heart of the argument: That right now and for the proximate future, our economy’s resources lie fallow – idle workers, idle real estate, idle capital. Leaving aside the old saw about the “devil’s workshop” (anti-social behavior among the unemployed, let’s say), an economy with idle resources is an economy that’s not as rich as it can be. Plus, an economy with a lot of folks in pain.

So the question is simple:

How best to put the resources back to work. If consumers won’t spend and businesses won’t spend, then only government can get the ball rolling.

Barro’s numbers assume that over time, government expenditures make for less growth than private ones. The key sentence: “heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports.” But over what period of time? In the first year? Do you really believe that people and businesses spent less money in 2008 than they otherwise would have because the government spent MORE? Who says? Past history? But there never WAS a 2008 before, was there?

The argument for stimulus is to restore confidence so businesses will again hire, putting resources back to work. The point of the multiplier is to get money out there so that it can be spent, and spent again. In the process, when it’s government that’s spending, public goods are being created, which benefits everyone.

The argument against is that rising debt levels and money creation will DAMPEN confidence. I know of no certain way to say which argument is correct and indeed, 100 years from now, economists will probably be arguing about the effects of the Obama stimulus package. All I can say with some degree of assurance about Robert Barro is that his column, in and of itself, is more likely to dampen than restore. In that sense, it could even be a self-fulfilling prophesy.