"The Stimulus Didn't Work"

So are all you guys who say “The Stimulus Didn’t Work” simply not worried about the Fiscal Cliff? Because that’s pretty much the flip side of the stimulus coin.

I’m not talking about “The Stimulus was not spent in the most effective way” (I agree, but I also think that any time you are rushing spending through, this is a major risk). I’m talking about those who simply say that it shouldn’t have been done at all, or if so, should have been less than half the size.

I think there’s a lot of misunderstanding on these issues, especially by political pundits.

Using more-or-less textbook undergraduate macro, i.e. the aggregate supply/demand model, there are two sorts of ways government policy can impact the economy. It can shift the aggregate demand curve or the aggregate supply curve. So fiscal policy that goes out and buys a lot of tractors would shift the aggregate demand curve rightward. This will result in greater inflation and real growth. Alternately, a change in tax policy that is revenue neutral but is more efficient could result in a rightward shift in the aggregate supply curve. This will result in greater real growth, preferably of the long-term variety, but less inflation.

So when trying to evaluate how a government policy will impact the economy, it is useful to begin at least by looking at how these curves will change from the first round effects. However, there are critical second round effects. This is because the central bank can also control aggregate demand by adjusting monetary policy. Supposing the economy begins at a place where the central bank believes their goals are being met, if the government enacts a policy that shifts the aggregate demand curve, then the central bank should act to completely offset this effect. This would bring the economy back where it started. Alternately, if the government shifts the aggregate supply curve, it is possible to also adjust policy to offset the effect. However, in this case the economy would not be back to where it started. Its final resting place would depend on the slope of the aggregate supply curve. This is because the central bank’s only lever is manipulating aggregate demand. A rightward shift in aggregate supply may lead the central bank to further expand aggregate demand in order to maintain an inflation goal. While inflation would be back to target, growth would be stronger than it was originally.

This is an important framework to think about fiscal and monetary policy, even though it ignores expectations. Even liberals, like Paul Krugman, buy into this argument. He would argue that fiscal policy can only be effective when the central bank is not able to boost aggregate demand, such as when we are in a liquidity trap. He would argue that we were in a liquidity trap and monetary policy was ineffective, therefore the stimulus was important. Conservatives, like Scott Sumner, disagree and usually think there’s no such thing as a liquidity trap (or at least a very low risk of one) and the central bank could boost aggregate demand with substantively few limits.

So, to answer your question, “the stimulus didn’t work” because the Fed failed. If the Fed had loosened monetary policy further, then it would have looked like the stimulus worked. Alternately, it is entirely within the realm of possibility for the Fed to offset the leftward shift in aggregate demand that the fiscal cliff will cause. To the extent that growth slows in early 2013, I would blame the Fed more than the government.

I feel like I should participate in this thread but I’m not sure how to respond to the question. First off, which stimulus? Are we talking about TARP, auto bailouts, QEx, or any number of the other programs over the last four years? Second, how are you measuring the success of these programs? I foresee a lot of counter-factuals in this thread.

Then, I fail to see how having a negative opinion of the stimulus programs has anything to do with how worried I should be about the fiscal cliff. What’s the connection?

I guess you’re saying because I didn’t want the stimulus (for the most part) that I should be for allowing the automatic spending cuts to happen? There are automatic tax hikes built into the fiscal cliff too so I don’t see how anyone would not be worried about it. Put another way, who is for both tax hikes and spending cuts?

None of this (your question) makes sense to me.

Well, I think a lot of these measures were useful (TARP, a bunch of the tax cuts, some infrastructure spending, unemployment insurance extensions, etc.) for keeping the economy from collapsing entirely. I’m not so sure about the auto bailout, but it does seem to have been more effective than bank bailouts at actually reviving that industry somewhat. So I’m worried about the Fiscal Cliff, of course.

I hear “The Stimulus Didn’t Work” mostly in the context of evaluating the President’s performance, and often as a charge that government can’t do anything to stimulate the economy in any relevant way, so it’s best just to cut taxes and go home. So I am thinking principally about “The Stimulus” in terms of fiscal stimulus, but you guys point out (and it’s true) that there has been plenty of monetary stimulus going on too.

In my mind, the monetary stimulus is a different (though relevant) dynamic, and it has problems because banks are trying to grow their balance sheets to the point where they can actually afford to list their assets at market value, as opposed to “whatever we feel will look good” value. Obviously, cutting bonuses to high executives isn’t part of the restoring balance sheets dynamic.

I think it is reasonable to consider the impact of different components of fiscal policy separately. For instance, infrastructure spending that will boost the long-term growth rate of the economy (by shifting LRAS), or even sustain the current level of infrastructure, might be something that should be undertaken regardless of the economic climate.

However, when pundits are saying the stimulus didn’t work, they are specifically referring to the ARRA bill from 2009, which is the President’s signature stimulus bill. This would exclude TARP and auto bailouts, but it would include: aid to states, tax cuts, some infrastructure spending, and changing some unemployment benefits.

The critics like to point to the administration forecasts of the path of unemployment with or without the stimulus, showing that unemployment actually went much higher than the administration forecasted, even with the stimulus. Of course, this isn’t to say that the stimulus caused unemployment to be worse, but it is also difficult to say that the stimulus “added jobs” since it is impossible to compare to the counterfactual world without stimulus.

Can someone smart please explain to me this concept people keep mentioning called the “Fiscal Cliff” in normal finance language, because I have no idea why people keep saying this thing. Like in one sentence if possible.


Unless the congress acts, beginning in 2013, taxes go up a lot due to expiry of Bush tax cuts, budget gets cut a little bit (about 100 billion per year), deficit comes down a little bit, and the economy slides back into recession.

And Treasury yields will decrease. Ironically, that would be the best time to borrow at those rates.

maybe, but lower borrowing costs for the US government is currently a non issue.

Fiscal cliff- basically like an austerity plan. Taxes go up, govt spending goes down.

(I only found out about this last week)

Okay, I guess it get it but not really.

“Under current law, which mandates these tax increases and spending cuts, total federal revenues would increase 19.6% from 2012 to 2013 and total federal spending would be reduced less than 1%.[3] The Congressional Budget Office (CBO) estimates revenues would rise from 15.7% GDP in 2012 to 18.4% GDP in 2013, returning to the historical average, while spending would fall from 22.9% GDP to 22.4% GDP, above the historical average of 21%.[3] The deficit for 2013 is projected to be reduced by roughly half, with the cumulative deficit over the next ten years to be lowered by as much as $7.1 trillion.”

But this is nothing new right? Why are people talking about it all of a sudden?

First, it is unavoidable, eventually after going on a shopping spree the credit card bill comes you and need to pay up, you can’t dodge it forever. Second, even if they did increase taxes and cut spending, how is this going to make any material difference? Try more like a 30% spending cut, not 1%! The revenue rise is slightly more significant, but still insignificant when you look at the big picture.

Does anyone expect that this will actually happen? Cmon, no way right? I don’t believe the mob is going to sign up to pay off any debt.

Fiscal cliff is the only way to have an increase in taxes because the Republicans will never vote for them.

What is O’s position? He thinks the fiscal cliff is a good thing (he will surely lose if so) or that it must be stopped with more intervention?

This is actually more interesting than the crappy treasury model I am making right now…sad.

@ Purealpha

"Second, even if they did increase taxes and cut spending, how is this going to make any material difference? "

On this point - the fiscal cliff is pretty huge. The numbers that I’ve read are that, if left unchecked, there would be a negative impact on US 2013 GDP of over 4 percentage points. i.e. it would drive the US economy into a recession.

I’m not American and don’t understand the nuances of the political system, but surely the congress will have to reach a compromise solution to greatly reduce the impact in the short term and spread the cuts out over a longer period.

On the broader point of whether the US stimulus worked, I think its worth compring the US to Europe at a high level. A couple of years ago both Europe and US had 9% unemployment. Not the US is below 8% and Europe heading towards 11%. The US economy is growing at about 2% at the moment, Europe is slightly contracting. Now there are other structural issues going on, but you could argue that Europe starting austerity earlier has been the main driver of that difference.

From an economists perspective, don’t you want your politicians to pursue counter-cyclical fiscal policy? Everyone is saying the EU is crazy for forcing the Eurozone periphery into recession through cuts and tax increases. But when Obama administration did the opposite and brought the US out of recession, he also gets criticised for the huge deficits and increase in debt. The UK has taken an opposing view and tried to make severe budgetary cuts. Their deficits have not reduced because growth has been below forecast. Their stock of debt keeps growing.

So perhaps in that light, we should look more favourably at the US stimulus impact?

Sorry, sensible analyses like yours are considered too well reasoned to be relevant.

There’s not enough outrage about “the children.”. Because, clearly, our children are better served by having unemployed parents today than by a larger tax bill tomorrow (or a larger tax bill today)."


No one - republicans or democrats - want the fiscal cliff to trigger. Those measures, the taxes hikes and drastic spending cuts, were put there to force new tax/spending policy. The fiscal cliff is a bipartisan problem.

The US is not the same as Europe.

First of all, the US has an independent Federal Reserve and monetary policy. We can print money. Europe cannot.

Second, the US economy is more innovative and more robust. Economic growth in the US is actually plausible through technology. In contrast, what has some place like Greece done in the past 50 years? Better olive oil and tourism?

Third, the US economy has fewer structural flaws than most European countries. Want to restructure a failed company in Spain? Good luck with all those 60-year-old workers who you cannot legally fire.

Fourth, politics in the US, while still dysfunctional, is still much, much better than the EU. Imagine a 27-member union where people from different member states have vast cultural differences and literally speak different languages. And any one of those countries can veto measures. Even small countries… like Slovakia or something. Good luck getting anything passed without a (figurative) gun to the head.

Fifth, the US has more confidence from the international community. When S&P downgraded US debt, US borrowing costs went *down*. The world still believes that if the world economy moves towards collapse, the US is still the safest place to put their money. The Euro, on the other hand, has traded like a risk asset for the past 2 years. No one is confident that the currency will even be around in 10 years. In a crisis, investors will flee from Europe. They are less likely to flee from the US. This is important, as it affects the countries’ ability to borrow money in a recession.

I’m not saying Obama has done well or not done well. However, it is not reasonable to measure US success vs. Europe. Europe is fucked up.

I agree with most of your points Ohai, although if you just compare the US with the UK then maybe the comparison is more interesting as your points 1, 3 and 4 no longer apply (or not to any great extent).

Points 2 and 5 do though I think, especially point number 2.

But the UK has the ability to print money and has a functioning government which can 100% decide its own policy decisions, yet is struggling hugely under the weight of what now appear to be ill advised austerity measures. In some ways the Tories have invented their own mini fiscal cliff to jump off. The UK deficit is still horrible and way behind target, as is the GDP growth rate. In my opinion pro-cyclical fiscal policy in a recession is a mistake all else equal.

Hmm. I haven’t read a lot of UK news, since the EZ crisis has been such a big thing lately. However, my impression is that the UK has had a lot of “backlash” response, as opposed to “here are the problems and these are the steps that we should take to fix them”. For instance, many of the UK financial regulation rules appeared to be punitive towards bankers, not in the spirit of problem solving. In the US, Dodd-Frank tries to address capital and risk management issues. In the UK, politicians attacked banker compensation.

I also get the impression that labor is much more powerful in the UK than in the US. In some US places like Michigan, maybe unions have significant influence. However, this is balanced out my non-union areas. More unions of course hamper the country’s ability to adjust to changing economic conditions.

Also, it seems to me that the UK’s economy is much less diversified than the US. They don’t have a Silicon Valley, farm belt, or mining, for instance.

Maybe someone from the UK can comment on the accuracy of these statement…

Aiaiai. What’s stopping the parents from starting a business? You are not seriously relying on the gvernment to create private sector jobs using the raised taxes, are you? Because that’s one thing (unlike FEMA disaster relief, for example) that the government sucks completely at.

Larger taxes have to be carefully justified, not just “the rich aren’t paying their fair share.” I am always tempted to say “one man, one vote - so why not one man, $10,000 in taxes per year”? The rich and the poor are using the same roads and schools, so why not equal taxes for everyone?

Obviously this is not only a flat tax but it is heartlessly regressive as well. Still, my point is that “fair” can mean many things. Unless the IRS gives me candy and flowers every April, I don’t see an upside to getting screwed harder.

I feel like I am caught between a Turd and a hard Chad. It’s not a meat sandwich I can enjoy. Maybe 1BigStudMuffin can tag me.