Stimulus Expectations Meet Reality
As Congress debates the latest fiscal stimulus bill, commentators have been debating the effectiveness of the previous one. Much of this debate has focused on funds flowing through state capitals, cities, and towns. Depending on whom you ask, these funds have been a critical lifeline or a colossal waste of money. Both views are probably overblown. Last year’s stimulus worked pretty much like previous efforts to boost the economy through state and local governments.
Last week, Harvard’s Ed Glaeser argued that the American Recovery and Reinvestment Act was poorly targeted, going to states that did not exhibit high pre-recession unemployment. White House economic advisor Jared Bernstein countered that Glaeser had ignored large chunks of federal money, namely unemployment benefits for individuals and Medicaid aid for states (precisely the funds that were targeted to economic conditions). Meanwhile, Joshua Aizenman and Gurnain Kaur Pasricha showed in a National Bureau of Economic Research paper that, using either measure, ARRA’s “net fiscal impact” was zero.
What gives? Did Paul Krugman’s prognostications about Fifty Little Hoovers come true? Not so fast. The NBER study asked not whether ARRA boosted the economy but merely whether it stimulated government spending. (Tax cuts are completely out of the story.)
There is no doubt federal outlays grew – to the tune of about $160 billion through last December according to the CBO. But, the NBER authors say, belt tightening by state and local governments almost completely offset this increase.
As the NBER authors note, “the counterfactual of the performance of the US economy in the absence of the fiscal stimulus is hard to ascertain.” In other words, no one knows what would have happened to government spending without the stimulus. They assume it would have chugged along at typical post-World War II levels, while others think we were headed for The Great Depression 2.0. In any event, it’s certainly not hard to find a governor who says that, but for those extra federal funds, their budget situation would be a lot worse.
So was ARRA a flop? No more so than usual. States and localities generally save federal dollars for a rainy day if they can get away with it, much like individuals save tax cuts. This tendency also frustrated Washington architects of General Revenue Sharing during the 1970s and 1980s.
In any case, expecting states and localities to bail out the national economy, aid the needy, and (literally) pave the way for a new economic future may be a bit much. Next time the federal government fights a recession by sending money to state and local governments (as it probably should), we should avoid weighing this effort down with excessive expectations.
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What was wrong with the ARRA, as well as the TARP in how it was eventually executed, is a classic agency problem. The federal gov't wanted funds spent in a particular manner but had an agent with a different set of objectives. State governors were less interested in hiring back laid off teachers than they were about buttressing rainy day funds just as bankers were less interested in lending after the TARP money helped recapitalize their banks. The reall failing in both of these efforts was on the part of the federal gov't to hold their agents – the state governors and the bankers – to perform as they wanted them to. Most of this was Congress's fault for writing such poorly supervised enabling legislation – they could have required more control and performance from the agents, especially since they had all the money, but did not. Instead, Congress handed the White House largely blank checks to do as they please. With Treasury overseeing TARP it is clear that banks got off very lightly in terms of performance. In terms of the ARRA stimulus to the states, it is also clear that the White House did not ask much in terms of performance. Congress should feel as if they were hoodwinked by these efforts, and the Dems should be feeling that way as they stumble into a potentially disastrous mid-term election.
As a “net zero effect” I take it to mean that the federal government gave and the state government took away. Zero sum game, except for the fact that the federal government borrowed to give the money to the states. So in effect all that happened is that the federal government sold bonds due at a future time, and the states spent. Since the states cant borrow money, in effect the federal government did the borrowing for them.
If in fact it is a zero sum issue, federal government borrowed, states cut equally, then the effect of the stimulus is zero; unless you look at the debt obligations. In which case the stimulus was not zero, but negative due to the fact that the federal government owes money.