Up Front

Is the Stimulus Working?

William G. Gale

Is the stimulus working? More than six months after it was enacted, it is a reasonable question to ask. It is probably impossible to prove at this point that the stimulus is or is not having a big effect. But a number of key factors suggest to me that the stimulus is positively affecting the economy.

First, it looks like consumer spending went up in the spring of 2009, despite the fact that the stock market was cratering then. It is hard to think of what would cause that besides the stimulus package.

Second, state and local purchases went up in the second quarter, stimulating GDP directly. It is hard to see how that could have happened without the sizable aid to states that was in the stimulus package, given that states’ financial conditions were getting worse.

Third, federal purchases went up, further stimulating GDP directly. Again, a stimulus effect. 

Fourth, it is important to think about the overall impact of the stimulus (and other government policies) not the individual components. It is possible that the fact that the Administration indicated that it would not stand by and let the economy collapse had an effect on people’s expectations and behavior – above and beyond the actual dollar flows of spending increases and tax cuts – and in particular that the expectational effect would have an effect before the associated dollar flow direct effects occur. If so, one would expect that investment, which is probably the most forward looking of any of the components of GDP, would respond favorably and that is indeed what happened.  

Fifth, a variety of forecasting models – like those of Goldman Sachs, Macro Advisers, Economy.com – seem to be finding substantial impacts (a 2%-3% point increase in growth, similar to what the Administration claims).  

Sixth, there is evidence that countries that had bigger stimulus packages have done better in the last two quarters than those that had smaller packages. 

So, to me, it looks quite plausible that the stimulus has had a significant impact, consistent with those emphasized by many of the leading industry models, consistent with much of the economics literature, and consistent with several key facts noted above. The passage of time will generate more data that will allow more nuanced tests and may be able to bring about more of a consensus.