The Psychology of Stimulus

Anyone who still thinks that stimulus expenditures in the second quarter of this year increased GDP or employment would do well to read John F. Cogan, John B. Taylor, and Volker Wieland, "The Stimulus Didn't Work," in the September 17 issue of the Wall Street Journal. They note that, consistent with theory, the transfer payments (the major component of the stimulus that was actually executed in the second quarter) appear not to have resulted in any measurable increase in personal consumption expenditures, as they constituted transitory income and therefore were largely saved; and that the modest stimulus spending on investment in that quarter probably had no effect. Rather, they attribute the reduction in the rate of decline of GDP in the second quarter to military spending unrelated to the stimulus and to a decline in the rate at which business investment was declining that began in January, before the enactment of the stimulus law in February.