Did the Stimulus Work?

This article appeared in The New York Times on November 1, 2009.

The Obama administration and many economists believe the fiscal stimulus package caused the positive G.D.P. growth, but this conclusion is not warranted. For starters, monetary policy has been highly expansionary over the past year, with short-term interest rates near zero, so the Fed may have played the major role in turning the economy around.

Research finds more evidence for the efficacy of monetary as opposed to fiscal policy in ending recessions. And the studies on fiscal stimulus have shown more impact from tax cuts than from spending increases.

We also do not know whether the positive G.D.P. growth resulted partially or mainly from natural equilibrating mechanisms, rather than from monetary or fiscal policy. Much discussion of the recession presumes it will end only because government comes to the rescue.

In fact, the U.S. economy recovered from significant recessions before 1914, when monetary and fiscal policy had not even been invented. Economies can and do recover on their own, and intervention might make things worse by generating uncertainty and distorting the economy's allocation of resources.

A further caveat is that two elements of the fiscal stimulus — cash-for-clunkers and the $8,000 tax credit for first-time home buyers — probably shifted significant activity from the fourth quarter and beyond to the third quarter because consumers knew these provisions would expire soon. Thus the stimulus plausibly shifted the timing of economic activity without necessarily improving the long-term path.

The case for additional stimulus is weak. If further stimulus occurs, it should focus on changes in policy that make sense independent of the recession. This means reductions in tax rates rather than increases in expenditure. Repeal of the corporate income tax would be ideal.

Jeffrey Miron

Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies in the Department of Economics at Harvard University and a Senior Fellow at The Cato Institute.