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What Impact Did President Obama's Stimulus Really Have?

Posted By Aleksey Gladyshev On February 26, 2010 @ 12:07 pm In Economics | Comments Disabled

President Barack Obama [1]

It has been a little over one year since the stimulus package was passed through Congress in order to spur private consumption and to decrease high unemployment, and a recent article published in the Wall Street Journal [2] by Harvard economist Robert Barro discusses the impact the stimulus has had on the economy.

The article argues that the government’s method of mass spending to improve economic conditions is an inefficient way to spend taxpayer money, and that the questions about whether the stimulus moderated the recession are complex – more complex than government organizations and committees might want people to think.

In his article, Barro states that:

[Answers about the impact of the stimulus on the recession] require more than merely counting the quantity of goods and services that the government purchased or the number of people that the government hired. We need to ask whether the government’s spending reduced or enhanced private spending and whether public-sector hiring lowered or raised private hiring… [M]y own analysis makes me skeptical about the numbers they’ve reported about GDP increases and saved jobs.

This statement is a direct challenge to White House reports [3] and government reports [4] that simply state the amount of jobs that were created, and that do not report whether jobs created were in the public or private sectors. It is easy to see and understand how jobs can be created in the public sector when money is handed out for these jobs to be created. The real question is this: will these same jobs last when the money runs out, thus creating a permanent impact on local economies, or will the jobs disappear the same time that the money is no longer available to pay workers their salaries, resulting in only a brief, fleeting jolt of stimulus? According to Barro, the answer to this question is the true benchmark of the effectiveness of the stimulus on spurring our economy.

Barro’s analysis also touches on economic output. For a whole-picture view, we must also consider by how much the $862 billion stimulus outlay will raise future GDP. He uses spending multipliers to estimate this impact. Barro says

[Si]nce the multipliers are less than one, the heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports… When one factors in the typical relationship between tax rates and tax revenue, the multiplier is around minus 1.1. Hence, an increase in taxes by $300 billion lowers GDP the next year by about $330 billion” (emphasis added).

His results might help to explain why the White House’s report on the impact of the stimulus was not a true analysis of policy [5]. What the report did was to simply subtract forecasts from the actual data, and attribute the difference to their policies. The truly analytical approach undertaken by Barro produces unpleasant results, and thus the White House opposed taking this approach.

When analyzing effects of the stimulus bill in Barro’s pragmatic manner, it becomes clear that the bill has created stimulus through borrowing at a higher price for the private sector. Barro comes to this conclusion because “viewed over 5 years, the fiscal stimulus package is a way to get an extra $600 billion of public spending at the cost of $900 billion in private expenditure. This is a bad deal.”

As was stated in Fact Sheet #50 [6], Congress is deliberating yet another multi-billion-dollar stimulus bill that features tax breaks for companies that hire new workers. The Heritage Foundation and Barro both agree that this new stimulus is not a good way to spend taxpayer money. To finish on this note, Barro concludes his article by saying “[t]he fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake.”

Aleksey Gladyshev currently is a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm [7]


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URL to article: http://blog.heritage.org/2010/02/26/what-impact-did-president-obamas-stimulus-really-have/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/Obama-health-summit-10-2-26.jpg

[2] a recent article published in the Wall Street Journal: http://online.wsj.com/article/SB10001424052748704751304575079260144504040.html

[3] White House reports: http://www.whitehouse.gov/sites/default/files/microsites/100113-economic-impact-arra-second-quarterly-report.pdf

[4] government reports: http://www.cbo.gov/doc.cfm?index=11044

[5] White House’s report on the impact of the stimulus was not a true analysis of policy: http://www.heritage.org/Research/Economy/wm2799.cfm

[6] Fact Sheet #50: http://www.heritage.org/Press/FactSheet/fs0050.cfm

[7] http://www.heritage.org/about/departments/ylp.cfm: http://www.heritage.org/about/departments/ylp.cfm

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