The ARRA was--I thought--supposed to be only one of three big stimulative policy moves that was going to be undertaken in 2009. The ARRA, use of the TARP money to fund a very large risky asset purchase program by the Treasury, and quantitative easing by the Federal Reserve in order to restor confidence that there was no chance of deflation. Only the first of these happened at any scale.
And we were unlucky.
How Did We Know The Stimulus Was Too Small?m: Those of us who say that the stimulus was too small are often accused of after-the-fact rationalization... But the... answer is that it’s all in the math: Keynesian analysis provides numbers as well as qualitative predictions, and given reasonable projections of the economy’s path in January 2009, the proposed stimulus just wasn’t big enough. Let’s go back to the tape, January 9, 2009:
Even the C.B.O. says, however, that “economic output over the next two years will average 6.8 percent below its potential.” This translates into $2.1 trillion of lost production. “Our economy could fall $1 trillion short of its full capacity,” declared Mr. Obama on Thursday. Well, he was actually understating things. To close a gap of more than $2 trillion — possibly a lot more, if the budget office projections turn out to be too optimistic — Mr. Obama offers a $775 billion plan. And that’s not enough.... [T]he Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job.
In practice, it was even worse, because one of the key elements of the plan — aid to state and local governments — was cut back sharply in the Senate. We ended up with only about $600 billion of real stimulus over that two-year period.
So this wasn’t a test of fiscal stimulus, even though it has played out that way in the political arena: the whole thing was obviously underpowered from the start.