The Dallas Fed Asks: Can the Nation Stimulate Its Way to Prosperity?


The short answer, as I'm sure we already know, is hell no.

The long answer is well it would work if what happens in practical application were as simple as what economic rocket scientists can puzzle out on paper.

Check out Jason Saving's thoughts:

Research suggests that unemployment insurance extensions and other programs that target individuals who have high marginal propensities to consume—that is, who tend to spend new dollars—provide the greatest fiscal bang for the buck, creating considerably more short-run economic activity than they displace.

In the middle of the pack are payroll-tax holidays—for example, the Making Work Pay credit—and generic budgetary aid to states. Both create on average slightly more short-run economic activity than they displace.

Trailing far behind these measures are more generous business depreciation provisions and extension of the AMT patch, which provide little boost to short-term consumption because they largely fail to target spenders.

Viewed through this prism, the stimulus plan is moderately well-targeted, with especially stimulative elements like an unemployment insurance extension intermingled with less-stimulative elements.

One caveat is that these multipliers assume stimulus funding will be timely as well as properly targeted. Just as a well-cooked meal cannot provide needed nourishment if the customer has perished in the meantime, well-targeted funding cannot bolster recessionary economic activity if it does not arrive until the recession is over.

Essentially what we have is the consumer sitting at the table rotting while plate after plate of hot stimulus is offered up in front of them. Yup, way to work that multiplier math.

The report goes on:

Compared with no stimulus, the stimulus plan in 2009 alone was expected to increase GDP by 1 to 3 percentage points, raise payroll employment by 500,000 to 1 million jobs and lower the unemployment rate by half a percentage point.

At first glance, it doesn’t appear the stimulus achieved these objectives. In the year after the plan’s passage, the labor market continued to hemorrhage jobs and unemployment climbed above 10 percent. Indeed, the unemployment rate is now higher than it was expected to be without the stimulus plan—and has been every month since the plan’s passage (Chart 5).



This seems inconsistent with official estimates of the plan’s performance. The first quarterly report, including data through September 2009, found that the plan had created or saved about 1 million jobs and boosted GDP 2 to 3 percentage points in the second and third quarters. Subsequent analysis from the Council of Economic Advisers and several private forecasting firms found even more favorable results, seeing the stimulus on track to save or create the 3.5 million jobs that were originally forecast for the 2009–10 period. How can this be?

The key proviso is this: what might have been. Simply put, there’s no way to know how badly the economy would have performed in the absence of fiscal stimulus and no way to prove how many jobs would have existed without stimulus.

Wait a second, are you telling me it was all bullshit?! You don't say!

I remind dear reader that unemployment would look far worse than it actually does if the unemployed had the strength left to stick around looking for work after 2 years of a whole lot of nothing. Between drop-outs and temporary Census hiring, we have an employment picture that looks far better than it should - sad considering it's at nearly 10% even with those two influences at work.

Glad the Dallas Fed has confirmed what I've been saying all along.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.

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