The latest Money magazine features an interview (not yet posted online) with Stanford economist John Taylor, who offers the following assessment of short-term stimulus measures:
After the recession began, Presidents Bush and Obama felt a need to “do something.” Their approaches differed, but both chose classic Keynesian stimulus policies. It didn’t work. My own research showed Bush’s temporary tax rebate in 2008 had no discernible effect on the economy. Nor did Obama’s $800 billion stimulus plan in 2009, which included tax rebates, increased federal spending, and grants to states for infrastructure projects. The stimulus increased the federal debt burden and created uncertainty about what was next for taxpayers.
What is the proof for this failure?
Households mostly saved the stimulus money instead of spending it. Even where there was a temporary boost to consumption, my research found it didn’t aid the recovery. Take the Cash for Clunkers program, which offered consumers an incentive to buy a new car. People who were planning to trade in their old car anyway turned it in a few months earlier. So there was a blip in new-car sales, followed by a decline.
The money sent to the states, meanwhile, didn’t really increase infrastructure spending. If a state already had a light-rail project under way, it just borrowed less and used some of the federal money instead — you didn’t see more light-rail projects.
What about the argument that things would have been worse if there had been no stimulus?
The models that suggest this are the ones that said in advance stimulus would work. Again, look at where the money went. It went to consumers. Then look at what households did when they got the money. The answer is, not much.
When asked this question, I sometimes tell a personal story. Several years ago, my wife got me new golf clubs for my birthday. I was all excited that this was going to be a real stimulus to my game. So a few years have gone by, and my game is just the same as ever. I didn’t want to make my wife feel bad, so I said, “Look, if you hadn’t gotten me these clubs, my game would have gotten a lot worse.”