Did the Stimulus Save Us?

I'm watching Obama claim that it is "largely thanks to the Recovery Act" that the recession didn't become a depression.  I supported the stimulus, and still do.  But this claim is ludicrous.

There's really very little question that the main mistake which created the Great Depression was allowing the banking system to collapse.  There were a number of reasons this happened, most notably horrific Federal Reserve policy and our insistence on sticking to the gold standard.  If FDR hadn't taken us off the gold standard and turned the banking system around, the Great Depression would have been even worse than it was.

So the main reason we didn't have the Great Depression is that the Treasury intervened to prop up financial institutions, while the Federal reserve pumped money into the economy with a firehose.  Special guest star credits go to the FDIC, which prevented the bank runs that crippled so much of our economy in the early 1930s.  If you want to credit a government program, credit TARP, not ARRA.

DId the stimulus help?  Sure.  But Recovery.gov currently has a nifty graphic showing that of ARRA's $787 billion in budget authority, the government has currently disbursed about $287 billion.  You'd have to posit some really remarkable multipliers for the stimulus to think that this prevented us from sliding into the Great Depression.

For comparison's sake, in 1930, GDP fell by 8.6% in real terms.  In 2009, the BEA says that it fell about 2.4%, or about $300 billion.  Had it fallen by anything close to 8%, that would have meant a decline of roughly a trillion dollars.

So the administration is claiming that by spending less than $300 billion, it managed to prevent more than $700 billion in economic decline--in other words, that the multiplier for their spending was higher than two.  They're saying that every dollar they spent increased GDP by more than $2. 

That's a pretty high estimate, especially when you compare it to the CBO's estimates of multipliers for various components of ARRA.  Even if you take the top end of the range they give for every one of those multipliers, you'd still fall short, because the bits that give you the most stimulative bang for your buck--the direct government spending--have so far disbursed the least money.

Of course, if you listen to someone like Robert Barro, you'd use a multiplier of more like 0.6 or 0.7, implying that the administration has probably so far boosted GDP by maybe $150 billion, or about 1%. 

1% is not nothing.  But it's not the difference between us and a band of desperate Okies hoping that the old Model T will make it all the way to California.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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