Did the stimulus work?

by Russ Roberts on November 2, 2009

in Stimulus

Jeffrey Miron, Simon Johnson, Mark Thoma and I answer the question here. Here is John Taylor’s answer.

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Simon Lvov November 2, 2009 at 2:44 pm

The best argument certainly belongs to Simon Johnson: Stimulus plan is appropriate because it has “…enabled President Obama … bringing along … appropriate stimulus…” A beauty!

Anonymous November 2, 2009 at 2:56 pm

While I’d agree with Jeff Miron that the Fed did quite a bit of the work, he seems to be forgetting his Milton Friedman:

“After the US experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die”

I’m not sure where Miron gets the idea that monetary policy especially expansionary right now. The argument I’ve been hearing is over whether it is still too tight or whether it is just right. I haven’t heard “highly expansionary” before – with the possible exception of mises.org.

Justin P November 3, 2009 at 2:18 am

What would you call the massive amounts of money the Fed is pumping into the banking system right now then?

Anonymous November 3, 2009 at 2:40 pm

Not especially expansionary for two reasons:

1. The recently inaugurated policy of paying interest on reserves changes the relationship between increased reserve levels and the money supply. In other words, what you’re seeing is a huge increase in M1, but the rate at which it gets out into the economy increased dramatically since I think it was last October when they started paying interest. People are still looking at M1 stats with a pre-2008 mindset. Other central banks have always done this.

2. People disagree on the correct inflation targeting rules, but none of the rules floating around out there say that what the Fed is doing now is particularly expansionary, because the output gap is so high and inflation is so low.

I should ask you – why do you think increasing reserves and low rates necessarily make for an expansionary policy? The economy is not a static thing. What may have been an expansionary rate or reserve level in 2005 may not be expansionary today.

Anonymous November 2, 2009 at 8:06 pm

Depends on how do you define “worked”. If you want the power of government increased, then ANY stimulus is good. If you are in favor of free markets, then this stimulus was of no use. Just shuffling money around.

Anonymous November 2, 2009 at 8:30 pm

The argument is that markets like engines, when “stalled”, work better with a “kick start”. That’s all the stimulus is meant to do. It makes sense and the evidence suggest indeed it does work.

Not only here but in Europe where the stimulus is built into their social safety net and they are seeing a faster recovery then us.

Nathan Scott November 2, 2009 at 8:36 pm

So the market works the same as an Internal Combustion Engine?

Why not an electric motor? Or a paddle wheel? Maybe like a space rocket?

Fast recovery? Like the one in Germany? Where the conservative German government was lambasted for not spending enough? Or maybe you mean fast recovery like in Spain where unemployment is over 17% still?

Crock of shit, through and through.

Anonymous November 2, 2009 at 8:10 pm

The crucial question is whether a large increase in government spending financed with borrowed money that swells the deficit to $1.4 trillion is good for confidence or bad for it. No one knows the answer.

I know the answer in my case. I’d be a lot more confident right now if my next project weren’t a “stimulus” project, and I’m confident regardless only because I believe the project would exist regardless.

Anonymous November 2, 2009 at 8:14 pm

Another interesting question is what is the tipping point that government economy takes over the private economy? It seems we are very close to that.

Anonymous November 3, 2009 at 2:23 am

I’m not sure there’s a tipping point as much as a gradual and possibly inevitable progression.

Anonymous November 2, 2009 at 8:41 pm

I guess there’s no point in trying to explain to muirdog the sheer lunacy of taking money from the private sector and giving it back in dribs and drabs as a way of breaking a market stall. It’s counter intuitive and totally compatible with socialism.

Anonymous November 2, 2009 at 11:28 pm

Sure the stimulus works. That’s why the economy is “recovering.” The problem is like when the starter motor is trying to start a car that has no gas.


The libertarian economic ideology foisted on our economy these last 30 years has sucked it dry. We’re trying to crank an engine with no gas. All the money is on top or in off shore accounts. The big spenders, (ie the middle class) have been sucked dry and can’t pick up demand Uncle Sam is trying to stimulate.

We’ve still a long way to go to turn around 30 years of Milton.

mesaeconoguy November 3, 2009 at 1:32 am

Here’s Ed Lazear (an actual economist, compared to Krugman, or whoever else you’re parroting this minute) talking about this in today’s WSJ:Stimulus and the Jobless Recovery

Anonymous November 3, 2009 at 3:04 am

Ed Lazear? An economist?

Here he is May of 2 thousand and fricking 8 still prediciting no recession.

MAY 8, 2008, 6:15 A.M. ET Lazear Sees No Recession for U.S. Economy


Anonymous November 3, 2009 at 2:42 pm

You don’t have to read past the subtitle to not take this guy seriously.

What the hell does he think “jobs created or saved” is if not net employment change. The point is it’s a net change from the counterfactual. Net change from last quarter isn’t entirely uninteresting, but it’s meaningless in interpreting the impact of a policy. Any economist could tell you that.

mesaeconoguy November 4, 2009 at 1:02 am

Yeah, no shit, eh? If the stimulus was working, we wouldn’t have 9.8% (going to 10+ shortly) unemployment now, would we?Please stop talking until you have remedied your acute cranial-rectal insertion problem.

Muchas gracias.

Zephyr November 3, 2009 at 2:14 am

Even though we are down from the peak, we are ahead of where we were 30 years ago.

Justin P November 3, 2009 at 2:43 am

We’ve still a long way to go to turn around 70 years of Keynes.

Justin P November 3, 2009 at 2:17 am

“Government spending was a negative factor, subtracting 0.9 percentage points from the change in GDP growth.”

Hmm, who would have thought?

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