Did The Fiscal Stimulus From 2009 Work?

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by: Cullen Roche

The White House recently released a rather lengthy report on the effects of the American Recovery and Reinvestment Act. They've stated that the ARRA was a big success and the White House is taking a good deal of credit for having implemented policy that helped steer the economy in the right direction in the last 5 years. Naturally, this has some conservatives upset. For instance, Scott Sumner harshly criticizes the program in this piece and refers to its analysis as "voodoo economics."

Now, the White House is obviously biased so let's just throw their assumptions out the window. But the CBO already settled this matter a few years ago when their bipartisan analysis showed that the fiscal stimulus was broadly positive. But let's ignore that also. Instead, let's try to use some basic understandings to analyze whether the stimulus "worked."

First, I don't know why conservatives have such a big beef with the fiscal stimulus. After all, it was mostly tax cuts. I consider myself a centrist who tends to lean slightly towards the fiscal conservative side and I can't figure out when so many conservatives started suddenly hating tax cuts so much? Sumner says they weren't "supply side" enough. So, if we'd cut business taxes and rich guy taxes more then that would have been better? How can that be right? Rich guys and businesses continued spending quickly after the credit crisis. Besides, weren't their balance sheets positively impacted by magnitudes via the "wealth effects" and other measures that helped boost corporate profits and stock prices to all-time highs? If the "weak recovery" is due to something, it's certainly not a lack of wealth at the top or profits….

Second, we know that the crisis was a debt crisis. Consumers stopped spending in large part because they couldn't service their debts that had been accumulated in the run-up to the crisis. So they paid down debts rather than spending on discretionary items that would have otherwise boosted economic growth. This reduced the broad money supply (repaying loans destroys money) and nearly sent the economy into a deflationary tailspin. When the government ran a deficit they issued net new financial assets that helped support the credit structure of the private sector. That means that private balance sheets were supported during a period when they were de-leveraging. The math here isn't all that complex. During a de-leveraging a government deficit adds net financial assets that helps support balance sheets. Anyone who says the deficit didn't help at all either doesn't understand basic accounting or must reject the idea that this was a credit crisis.

Of course, this doesn't mean government spending can always solve our problems or that all of the stimulus was good. In fact, I argued against pieces of the stimulus package such as the "cash for clunkers" program and homebuyers tax credit. But the basic accounting is fairly simple and anyone who understands the dynamics should see that the issuance of government net financial assets during a de-leveraging would help support broken balance sheets.

Lastly, I also don't see why we have to draw a line in the sand in macro debates and try to establish that one side is COMPLETELY wrong. After all, if we're going to claim that fiscal policy didn't "work" because the economy is still weak, then that means monetary policy doesn't work either. I personally think the truth is somewhere in-between and that monetary and fiscal policy can play important roles in helping the economy depending on the precise circumstances. So I find these outright dismissals of certain policy approaches to be rather counterproductive and often based on an attempt to sweep away the facts in favor of one's particular politics…