## Estimating the Effect of Stimulus: Just What Is Going on Here?

UPDATE: I owe an apology to Mark Sadowski: I plagiarized his comment. Please accept my assurances that I did so unconsciously.

Sigh: The Effects of the Obama Fiscal Stimulus Once Again: I thought the key passage to debunking the Cogan-Taylor-Wieland WSJ oped was the following:

"Of the entire $787 billion stimulus package, only$4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package." I'm not sure exactly where these figures are coming from but let's assume they're correct. This would sum up to$22.2 billion in net new spending directly attributable to the stimulus. GDP in the second quarter was about $3.5 trillion. Thus$22.2 billion is about 0.62% of the second quarter GDP. However if we convert that to an annual rate that means that the net increase in government spending in the second quarter attributable to the stimulus added 2.5% to GDP growth in the second quarter or exactly the same amount as the average of the six vector autoregressions of the private forecasters and the CEA mentioned above.

Now, Cogan, Taylor and Wieland surely know this, but evidently they simply "forgot" to mention it.

Based on this evidence alone I think there were already sound reasons to disregard their article. The fact that they didn't even bother to perform any econometric analysis simply nails it.

@Neal, In my view the fundamental problem in the United States at least is to use discretionary fiscal stimulus to lift aggregate demand to the point that monetary policy has traction once again. One of the biggest problems in this regard has been the steady pounding aggregate demand has been taking from the six quarters of declining net asset balances and the resultant negative wealth effect. But the most recent release by the Federal Reserve shows an increase in net asset balances. I find this somewhat encouraging.

@Bill, Interestingly someone recently pointed out to me that consumer confidence rose sharply in April after the stimulus started to be doled out. Separating the psychological from the tangible may be difficult but if the stimulus' effects were mainly psychological wouldn't it have increased consumer confidence in February when it was signed into law?

On the other hand, it is worth noting that the freefall in business investment essentially stopped in February. Hmmm.

Me:

Cogan, Taylor, and Wieland claim that the stimulus isn't working--that it had no impact on second quarter GDP. Yet they also write:

John Cogan, John Taylor, and Volker Wieland: The Stimulus Didn’t Work - WSJ.com: Of the entire $787 billion stimulus package, only$4.5 billion went to federal purchases and $17.7 billion to state and local purchases in the second quarter. The growth improvement in the second quarter must have been largely due to factors other than the stimulus package... Nobody disputes that if that federal spending hadn't been there federal spending would have been lower by$4.5 billion. Nobody disputes that if that aid to the states hadn't been there state spending would have been lower (or taxes higher) by $17.7 billion. That's$22 billion in extra spending in the second quarter... that's 0.6% of second quarter GDP... to boost second quarter GDP by 0.6%... that's a 2.4% per year boost to the annual GDP growth rate.

What is the Obama administration claiming as the effect in the second quarter of their expansionary fiscal policy? 2.3%.

Just what is going on here? Just what do they think they are doing?