Where Did All the Money Go? Stimulus in Fact and Fantasy

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The Obama stimulus remains controversial even as we approach the fourth anniversary of its launch.

The most thorough assessment of its impact, John Cogan and John Taylor’s “What the Government Purchases Multiplier Actually Multiplied in the 2009 Stimulus Package” (see also Taylor, “An Empirical Analysis of the Revival of Fiscal Activism in the 2000s”) concludes that the stimulus had no impact on economic activity. Focusing on its impact on state governments, Cogan and Taylor contend that stimulus money simply allowed the states to build up their financial assets or reduce borrowing. We reassess the impact of the stimulus, focusing, like Cogan and Taylor, on the states. We find that the states spent about 2/3 of the stimulus money. Overall, we conclude that, over the period from mid-2009 to mid-2011 the stimulus added some 2 percent to GDP, in line with Congressional Budget Office estimates.

Our analysis has three parts. First, we analyze the regressions Cogan and Taylor interpret as supporting their contentions with regard to the impact of the stimulus on spending by the states. We find that these regressions do not support their conclusions. Based on aggregate time series of revenues and expenditures and including lagged dependent variables, the regression coefficients are misleading: because of serial correlation in the data, the regressions produce high coefficients on the lagged dependent variables and correspondingly low coefficients on the other variables regardless of whether the structure specified by Cogan and Taylor has any validity.

Second, we analyze the cross-sectional relationship between spending by state governments and injection of stimulus money. The data for Fiscal Year 2010 (July 2009 to June 2010) suggest that a dollar of stimulus money was divided between spending (2/3) and shoring up the state’s balance sheet (1/3).

Third, we report the results of a survey of state budget officers. The results are remarkably uniform: despite differences in political orientation of their governments, and consequent differences in their evaluations of the wisdom of the stimulus, the general view is that the stimulus allowed the states to maintain expenditures that would have necessarily been cut in its absence.