The Stimulus Didn't Work[Six Months After, We Can Look And See What Actually Happened]

The Wall Street Journal ^ | SEPTEMBER 17, 2009 | By JOHN F. COGAN, JOHN B. TAYLOR AND VOLKER WIELAND

[Son House]

Administration economists cited Keynesian models that predicted that the $787 billion stimulus package would increase GDP by enough to create 3.6 million jobs....more modern macroeconomic models predicted only one-sixth of that GDP impact.

Consider first the part of the package that consists of government transfers and rebates.

The nearby chart reviews income and consumption through July

(DPI)--the total amount of income people have left to spend after they pay taxes and receive transfers from the government--jumped. The increase is due to the transfer and rebate payments in the 2009 stimulus package. However, as the chart also shows, there was no noticeable impact on personal consumption expenditures.

This is exactly what one would expect from "permanent income" or "life-cycle" theories of consumption, which argue that temporary changes in income have little effect on consumption. These theories were developed by Milton Friedman and Franco Modigliani 50 years ago, and have been empirically tested many times. They are much more accurate than simple Keynesian theories of consumption, so the lack of an impact should not be surprising.

Indeed, one need not have looked any further than the Bush administration's Economic Stimulus Act of 2008 to find plenty of evidence that temporary payments of this kind would not jump-start consumption. That package made one-time payments and rebates to people in the spring of 2008, but, as the chart shows, failed to stimulate consumption as had been hoped.

... the resilience of the private sector following the fall 2008 panic--not the fiscal stimulus program--deserves the lion's share of the credit for the impressive growth improvement from the first to the second quarter.

...it is important to continue assessing the role played by the stimulus package

...These assessments can be a valuable guide to future policy makers in designing effective policy responses to economic downturns.

[TruthBeforeAll]

The reason the pce's dropped like a rock is because people were still reeling from the 2x to 3x utility and fuel bills they had just received and were hoarding money out of fear that the prices would continue to skyrocket. IMHO, that is what started the whole economic collapse. People simply not knowing what it was going to cost to heat their homes and fuel their cars in the coming winter. Consumer confidence still has not recovered from that.

[Son House]

Yep, it wouldn’t be passing tax and spend legislation producing bad economic data to analyze

[FastCoyote]

[There will be a recovery (it’s happening very slowly) and what conservatives need to do is have an argument ready to deny the credit to Hussein.]

I wouldn’t worry about explaining that recovery, the next wave of the bank collapse will hit sometime in the spring.