Was “the Stimulus Package” An Expansionary Keynesian Policy?

John Taylor doesn’t think so.

Taylor is on everyone’s short list for a Nobel Prize at some point – he’s been very influential on how monetary policy is actually conducted in the real world.

In the piece entitled “The Obama Stimulus Impact? Zero” from the December 9, 2010 issue of The Wall Street Journal, he and John Cogan argue that:

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. [emphasis added]

Taylor is not a Keynesian, so he is playing the part of the devil’s advocate. Having said that, “the stimulus package” was sold to the public as a Keynesian package.

Here’s some evidence:

Recently released Commerce Department data show that 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). Infrastructure spending increased by an even smaller amount: $4 billion. In a $14 trillion economy, these amounts are immaterial.

The Commerce Department also provides data on ARRA grants to state and local governments and the amount of purchases by these governments. According to these data, 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.

You’re reading this correctly: the portion of “the stimulus package” that was meant to be stimulating in the way it was advertised was miniscule.