Thursday, December 30, 2010

Keynesian Theory Suggests the Stimulus Package Was Just Crap

John F. Cogan and John B. Taylor:†

The key tenet of Keynesian economics is that government purchases of goods and services stimulate additional economic activity beyond the amount of the purchase itself. …

[The stimulus package] attempted to stimulate government purchases in two ways. First, it provided funds to finance federal government purchases of goods and services … Second, it provided grants to states and local governments to enable them to increase purchases of similar goods and services.

… Of the $862 billion stimulus package, the change in government purchases at the federal level has, thus far, been extremely small. From the first quarter of 2009 through the third quarter of 2010, government purchases have increased by only 3% of the $862 billion ($24 billion). …

… State and local government purchases of goods and services did not increase at all in response to the large federal stimulus grants. These purchases have remained slightly below their pre-ARRA level since the fourth quarter of 2008.

In sum, the stimulus package was a bunch of crap, pushed by politicians, who lied about how it fit into a particular economic theory.

Note that this isn’t even belaboring the point that Keynesian theory doesn’t seem to be correct on all – or even many – counts.

And it tends to support Paul Krugman’s point, albeit in a backhanded way. Krugman has asserted that the stimulus didn’t work because it wasn’t big enough. He’s right. Most of it was crap. He’s naive to think that others should pony up more cash for stimulus he pushed so hard for, when the last load of that crap got flushed down the toilet.

† Most economists would agree with me that Taylor is probably on the "medium" list to get a Nobel Prize in the future.

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