The CBO came out today with a new report on the effect of the stimulus, or the American Recovery and Reinvestment Act (ARRA). The conclusion is that the stimulus has had essentially the same impact on GDP and employment as the CBO predicted in March 2009 -- lifting production by between 1 and 3 percent and raising employment by between 0.6 and 1.6 percent. The conventional wisdom (which I've helped forward sometimes) is that the stimulus has worked much worse than the government expected. But the fact that the CBO's new estimates are only changing by fractions of a percentage point -- and often for the better -- suggests that the conventional wisdom isn't so wise.
The most interesting graph here shows what provisions the CBO estimates as having the highest multplier effect. The multiplier is a measure of how government spending translates into output. So if the government spends $100 and GDP increases by $200, the multiplier is equal to 2. Check out what the types of stimulus activity correspond with the highest multipliers (they're listed in that order in the graph below):
The CBO is a nonpartisan agency, but this sure looks like the handiwork of dirty Keynesians, doesn't it? The highest estimated multipliers are direct government purchases of goods and services and infrastructure projects. In the middle, you have social net payments to individuals like students and the unemployed. And at the bottom, you have the homebuyer credit (horrible) and tax cuts for rich people by extending the AMT patch. There are a lot of smart people out there who are writing that this stimulus didn't have enough tax cuts, but I think reports like this have to make you wonder whether, in a recession, the best, easiest, surest thing to do is to simply use the government's coffers to plug up huge gaps in demand for goods and services. Big fat government spending can sometimes trigger a significant shift in resources and distort the economy, but this economy is so weak that we haven't seen much of a crowding-out effect. As the CBO concludes:
In the other direction, substantial government spending can cause a shift in resources (including employees) away from production in other firms and sectors to government-funded projects. That indirect crowding- out effect could cause growth in employment among recipients of ARRA funding to be offset by declines in employment elsewhere in the economy. Increases in interest rates are one mechanism for such crowding out: Higher interest rates discourage spending on investment and on durable goods such as cars because they raise the cost of borrowed funds. However, that mechanism has not been an important factor this year because the Federal Reserve has held short-term interest rates at very low levels. Activities funded by ARRA could also reduce production elsewhere in the economy if they used scarce materials or workers with specific skills, creating bottlenecks that hindered other activities. That effect, too, has been much smaller this year than it might be otherwise because of the high unemployment rate and large amount of unused resources (as well as the diversity of activities funded under ARRA)