Recap: The Stimulus Bill and the Macro Impact

CBO has now released an analysis of spend rates of the final stimulus bill to be signed by the President on Tuesday. While the proportions of expenditures and tax cuts are changed, the time profile is little changed from the original House bill — wherein most of the stimulus takes place in the next 19.5 months.


Figure 1: Estimated spending and tax revenue reductions, per fiscal year, embodied in HR 1 final version. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009).

Once again, I want to stress the adjectives “massive stimulus” conjoined to the noun “bill” is a matter of context. Dividing by baseline GDP shows that in a proportional (rather than dollar) sense the bill is rather modest. The fiscal impulse to GDP ratio never exceeds 2.5 ppts in any given fiscal year.


Figure 2: Estimated spending and tax revenue reductions, per fiscal year, divided by GDP. Shaded areas pertain to spending occurring outside of the 19.5 month time frame. Source: CBO, H.R. 1, American Recovery and Reinvestment Act of 2009 (February 13, 2009) and CBO, The Budget and Economic Outlook: Fiscal Years 2009 to 2019, January 8, 2009.

Finally, the degree of “modesty” is highlighted by the challenges — in the form of the massive negative and persistent output gap [0] — we are facing in the absence of countervailing fiscal policy.


Table 1: from CBO, Estimated Macroeconomic Impacts of H.R. 1 as Passed by the House and by the Senate, February 11, 2009.

It’s not a perfect bill. I would have preferred more public investment spending, more transfers to the states for fiscal stabilization, and less tax cuts. But it’s certainly better than nothing — or all tax cuts (which is what I gather the opposition wanted). Here is a description of the components that have an impact on state finances.[1]

The Real World

I want to stress two facts. First, the CBO and all major macro forecasting firms (to my knowledge) are projecting a change relative to baseline due to the stimulus bill. I think those who are asserting zero effect from the stimulus should provide the empirical estimates that buttress their case (this is different from saying the effects would be small — that is implicit in the range of CBO estimates, and the range of multipliers cited by CBO [2]).

The Rest of the World

Second, with rest-of-world output declining [3], and fiscal policies moving toward a more expansionary stance, the fear that additional budget deficits in the US will manifest in a higher risk premium associated with Treasury debt is mitigated. In other words portfolio balance effects [4] are of less concern since all other governments are issuing debt. (Of course, I — unlike some others — do believe that deficits matter [5]; holding all else constant, deficits should raise interest rates. Of course, with credit demand collapsing around the world, not all else is held constant.)

The Opponents of Stimulus and the Abdication of Responsibility

By the way, I have been amused at how some policymakers have taken to quoting the “temporary, timely and targetted” criteria attributed to NEC Chair Summers, as if the stimulus does not fit these three criteria.[6] As Figures 1 and 2 demonstrate, the bulk of the stimulus takes place during a period when it would be needed — namely when the baseline output gap is -7.4 and -6.3 ppts of GDP (Table 1 above). And according to the CBO, the stimulus is temporary (i.e., it “tails off” in the out years). This disjuncture between reality and assertion induces me to restate — saying something repeatedly without supportive data doesn’t make it so. I’d also say that the repeated critique without clear alternative merely highlights the lack of an idea of what would be a better policy. Or as one observer put it:

…congressional Republicans were never really willing to concede the principle that stimulus was needed. Their tax plan was just a rehash of old hash that was never plausibly linked to the particular economic problems we have today. I disagree about the payroll tax for various reasons, but at least it would have been focused on the reality of the situation, rather than just being a pointless political exercise. I believe that reinstitution of the Investment Tax Credit would have been the best Republican alternative. I made the argument here, but got no takers.

In the end, Republicans preferred to reject the principle of stimulus, thus taking themselves out of the game. I think that was a mistake, both politically and substantively.

Source: Bruce Bartlett at NRO. (h/t Brad Delong)

[Update – 12 noon 2/17/09]

I talked about the stimulus bill on NPR/WBUR’s On Point today. Apparently, one can download a podcast of the show.

Update – 6:10pm 2/17

More analysis from a “fiscal responsbility” perspective, from the Committee for a Responsible Budget here. Their survey of multipliers is here.

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41 thoughts on “Recap: The Stimulus Bill and the Macro Impact

  1. prophets

    must be nice to live in the world of economics where multipliers simply justify the bottom line investment decision.
    the rest of us who live in the real world of finance have to justify NPV transactions with hard numbers and not simply extrapolate old facts/figures into new realities.
    Less automobiles being purchased by consumers? Big 3 need a bailout? It’s just an output gap problem… just have the government step in and buy 5 million cars so that the auto companies can run at full capacity until private consumption bounces back… sure.

  2. M

    Here is Bill Clinton’s criticism of federal stimulus:
    “He [Obama] has reached across, and it takes two to tango. I find it amazing that Republicans, who doubled the debt of the country in eight years and produced no new jobs doing it gave us an economic record that is totally bereft of any productive result are now criticizing him for spending money. … This stimulus is our bridge over troubled waters. He did the right thing.”
    So, we know that a bad stimulus can have a multiplier less than one.

  3. kharris

    So guys, your criticism of Menzie’s post is that, when trying to deal with the future, we should not try to figure out what will happen in the future?
    So, let me try to explain this in terms that, with luck, will help those who have been unable to understand the debate so far. A net present value calculation is appropriate to a private concern, because a private concern is unable to capture all the benefits of its own efforts. Pay to workers is a cost to the private concern. When they spend their wages, most of that spending goes to firms other than their employer, so any second-round impact is largely lost to the employer. (Henry Ford thought that in his situation, he could recoup a big chunk of his workers wages. I will leave it to economic historians to figure out whether he actually did.) From a public policy point of view, the second-round impact is important, because public policy has to do with overall welfare, not just the net of individual firms or of the business sector. We use multipliers to figure out what that second round impact is, so that we can make policy in a way that gets the most out of the money we spend – to spend efficiently. In the case that politicians argue against making policy that generates the greatest public welfare, at least we can know through multiplier analysis how far short we have fallen.
    There, does that help? ‘Cause anybody who can’t understand how this stuff works has no business using the word “ignorant” on an economics blog.

  4. DickF

    Menzie wrote:
    …empirical estimates that buttress their case…
    How about this for the first trading day after the “stimulus” was passed. Foreign markets are decidedly down. US futures are down. Looks like the markets just love stimulus…NOT!
    As in the Bush administration – when the markets first crashed – the cause of the market’s decline is congress voting for “stimulus.” It doesn’t matter whether it is Bush or Obama the result is the same. Our problem IS government stimulating the markets to fall not recover.

  5. Steve

    OK, let’s use the term willfull or blissfully ignorant!
    The Government has so co-opted the place of the private market that a normal recovery cannot occur. I suggest, Menzie, that you read the book, A Conservative History of the American Left. While it not strictly a book of economic theory, it is very factual on the damage done. A for instance would be the following statistic. Total inflation for this country in it’s first 125 years was 10%. Once Congress abdicated it’s roll to control money and the Fed was created, inflation through 2008 was over 2000%.
    Oh my, the damage done!

  6. Terry

    My key exception with this article is that, unfortunately, I think that the multiplier effect will be much less than the CBO estimates. Not zero, but much lower.
    A longer term concern is that I envision that this will be only the first of several stimulus bills, each adding a US$ trillion or so to our national debt. It is hard for me to see how the US$ will remain strong in such a circumstance although we have the advantage (in a highly negative way) that all other major economies-especially banking sectors–and their currencies are in worse shape than ours.
    The major country that leads us out of this depression will likely become the cornerstone economy and currency of the world. I’m not betting it will be the US and the dollar, at least not yet.

  7. Ben

    Many of the arguments against the stimulus cite the Japanese economic decline of the 1990’s. Of any of the examples of stimulus not working, that one has the most traction with me. They had a major real estate bubble. When it popped the banks were left holding massive amounts of bad loans. The government stimulus plans have run their national debt to just under 2 times GDP.
    What, if any, differences do you see between the US stimulus bill and the spending in Japan in the past? Do you see major differences between the two in the lead up to their respective economic downturns? Where can we use it as an example?

  8. Dan Weber

    I think the stimulus bill is pretty bad, but the Republicans deserve lots of blame for not putting up any kind of decent opposition.
    Instead of having Congress pick the winners and losers, most of the stimulus should have just been a direct transfer to the states, who are having massive budget problems.
    The Republicans in Congress (who are, after all, in Congress) don’t want to skip any opportunity to increase Congress’s power. In 10 or 20 years they’ll have control back, and all this power currently being grabbed by Congress will be theirs.

  9. prophets

    The multiplier in these arguments is about as credible as the analysis analysts were doing during the .com bubble.
    They made up ratios like value per eyeball and had assumptions like terminal growth rates of 5%+ even though the economy itself could never grow that rate indefinitely.
    It’s really amazing how hocus pocus gets passed off as a legitimate factual datapoint. Contains an ounce of truth and it is suddenly the basis for $800 in spending… unreal.

  10. Dave Johnson

    Dan Weber,
    I am not sure I understand the reason to transfer money from the Feds to the States. If you really take the time to look at States, Those run with democrat Legislatures are a mess and those run by Conservatives are doing OK despite the Federal Government.
    You can blame Bush for this mess but it does not change this fact. Our Founding Fathers ran the Federal Government on 2% of GDP. After coming into office with a recession, JFK turned around the economy with a very simple Blue Print. Nixon sold that Blue Print out for spending and created another mess which Carter looked to the FDR Blue Print and made a real mess of the economy. Reagan came in to office and built a economic model based on much of the JFK model to clean up the mess. Bush 1 had a Banking mess with 1300 banks going broke. Bush 1 could have punted this mess to the next guy but made the choice to fix it. Clinton came into office with an economy growing at 5.2% and held the economy to a very low roar with his best growth over 8 years being 2.4 percent? Clinton then cooked the CEO numbers and Bush 2 found the economy in a recession. Which he fixed with the JFK/Reagan models.
    I am not a fan of Bush one or two for various reasons. That does not change the fact that when it came to economics, neither re-invented the wheel.
    Obama is using the FDR model with out creating new Dams or Proven Energy to drive any future economic recovery. In less then a month
    Obama has created an economic quagmire that will leave us slogging though an economic mess for many years to come.
    So continue to blame Bush for our economic woes if you wish. Bush did not create Sarbanes Oxley, Consumers Re-Development act, Mark to Market, push to remove Glass Stiegel and started telling the American people about the problems with our Banking system in 2001 and 2004.
    Bush ran jobs numbers of 95% employment right up until the American people voted in a democrat Congress. The Stock Market was volatile but held its own until the point Obama started leading in the polling.
    I guess I am the only guy in the world who really thinks this mess was engineered and an entire world economy does not crash in a single day, 35 days before an election.
    So bash away!

  11. Dan Weber

    If you really take the time to look at States, Those run with democrat Legislatures are a mess and those run by Conservatives are doing OK despite the Federal Government.
    I’ll take your word for it. But I propose that all states get money, in proportion to their population. So these states run by Conservatives will have extra money to use as they wish. Maybe they can lower their tax rates and draw in more people and businesses.
    I’m not sure who you were talking to in the rest of your comment but hopefully they’ll respond.

  12. Dave Johnsohn

    Dan Weber,
    I was not blasting any one in General. Just wrote some thoughts after reading posts of the past.

  13. Silas Barta

    Menzie_Chinn: What economic numbers, at what time, would cause you to say, “I guess I was wrong about the capabilities of government economic stimulus”?

  14. Mike Snow

    trying to not be cynical but the bulk of the money hits in 2010. What else happens in 2010? Oh yea, congressional elections! The people in congress are way more focused on preventing their unemployment than anything else.

  15. Charles

    Um. Mike. Budget years aren’t the same as calendar years. The 2009 budget year is almost half over. The money is getting pumped out as fast as it can reasonably be absorbed.
    On a separate isssue, the claims that the stimulus is a political issue designed to bail out Democratic states is, well, silly and false. First, the state that is in the most trouble is California, with a Republican governor. That governor, working with the Republicans in the legislature, managed to put the state in fiscal crisis well ahead of the housing collapse. Now, the housing collapse– which, despite Republican lies to the contrary, Democrats had very little to do with– has pushed the state over the brink.
    Or take New Mexico. Both parties pushed for a reckless tax cut, which worked as long as commodities prices were sky high. Now that they’ve collapsed, the state is in trouble. True, the legislature and governor are nominally Democratic, but when one looks at who opposed the reckless tax cut, they were all Democrats and independents (Greens, mostly).
    Republican propaganda is remarkably immune to facts, moderation, and reason.

  16. Dave Johnson

    If Obama really wanted this money into the economy. He could do it though income tax cuts and start distribution in two weeks. The entire thing could be spent in any number of months he should choose, instead of the bulk being 18 months out.
    Should Obama pick Americas winners and losers though his targeting? One could bet the Stock Market winners of Pork and Spend though Lobbyists and political Contributors?
    I hear Obama is now killing jobs in the Dirt Bike Industry? I will also bet these little kids Dirt Bikes do not have near the Carbon Footprint of these Jet Setting Aging Hippies Private Jets.
    Auh, who care about these jobs.

  17. Steve

    Please! The State of California is a Liberal democrat dominated state. It is a microcosm of what damage is done by liberals who believe in saving the world even if it wipes out the collective wealth of generations. It is in trouble because the wealth, business and brains are fleeing into neighboring states where there is still a chance to live as semi-free citizens. What once was a wonderful place has been transformed into a mess.

  18. Menzie Chinn

    A note to all: There is an automatic filter that puts a delay on posting of certain comments. I don’t know how it works, or what induces it to flag certain posts. Sometimes it delays posting my own comments. But, in my experience, almost every comment eventually posts. I do not monitor the posts continuously as I have a day job. So be patient. If it takes more than a couple hours, then please email me and I will take whatever action I can. I have in my three plus years blogging only deleted one comment for content, and shortened one (very long) comment.

  19. DickF

    Let me support Menzie. I have been posting here for a while and some of my posts have been lost but my most caustic have always made it to the board. Have patience. Menzie and JDH do an amazing job here and take a lot of abuse. I appreciate it. Of course that doesn’t mean I am going to be less abusive. 🙂

  20. Buzzcut

    For the cost of this bill, you could give everyone in the country a payroll tax holiday for one entire year.
    As for the temporary nature of this bill, that would assume that the new baselines it establishes in budgets across the governmental sector are cut back in future years.
    Considering the… crap… given to Newt Gingrich back in ’95 when he attempted to decrease the growth rate in governmental programs (he didn’t cut any programs, he just tried to get them to grow more slowly), it is unlikely that ANY of the spending in this stimulus is temporary. New baselines will be built, and they will be extended as far as the eye can see.

  21. Charles

    Dave Johnson, “If Obama really wanted this money into the economy. He could do it though income tax cuts and start distribution in two weeks.”
    Dave, (a) you’re wrong about the speed of distribution and (b) this issue has been researched to death and you’re wrong.
    As for the speed, when they did rebates in the past, it took a number of months not weeks to get the checks out.
    As for the effectiveness of tax cuts as stimulus, tax cuts have perhaps the lowest bang for the buck of any form of stimulus (see CBPP. People tend to save them, not spend them, meaning that they may produce only 60 cents of current economic growth per dollar spent. The most effective form of stimulus is aid to the very poor, such as Food Stamps. This immediately gets spent, and has roughly the effect of $1.50 on economic growth per dollar spent.
    You may not want to hear these things, but they’re true, and you would serve your own interests better if you would learn them.
    Steve, if California is so dominated by liberal Democrats, why have they unable to pass a budget? Trying to pretend that Republicans don’t hold the governorship and veto power in the legislature simply makes you look foolish.

  22. Dave Johnson

    All an employee would need to do in order to get quick income tax cut would be to adjust the number of claimed dependants on their taxes paid by their employers. POOF, tax cut on next pay check.
    California Republicans are the same as those the media pumps in the National Primary. They are far to the left side of JFK. Dollars are not a problem for California, spending is.
    Any one who pays California Taxes and not a freeloader who is paid them in vote buying schemes will tell you California is a Liberal mess. Even Socialist.

  23. Anonymous

    Menzie: Heard you on NPR’s On Point this morning. Very good. Hope they invite you back.
    Dave Johnson: You said that you just heard about the govt trying to take down the dirt bike industry. Let me also note, just for the record, that this was a big topic on Rush Limbaugh today. Coincidence?

  24. Babinich

    “empirical estimates”

    Menzie, sorry for coming off so harsh (“ignorant”). I didn’t intend it that way.

    My question is how does one go about employing an empirical estimate when there are so many variables in the equation?

  25. markbrown in NJ

    Menzie, heard you on onpoint today. A few questions about this post: 1) do you really buy the (i believe false presumption that the baseline unemployment rate will ONLY be 9%??)
    I am almost certain we’re currently in depression 2.0, but it won’t be acknowledged by economists until we get to 15-20% unemployment.
    I think that if we tell Detroit to cut jobs and become more “self-reliant”, we’ve just added 2-3% at a minimum to the unemployment rate, and will be much worse for killing the manufacturing base of the country.
    #2: I think that we need to save the JOBS detroit has, but (perhaps) dump, or even NATIONALIZE the auto companies (so we can PUSH them into becoming green manufacturers in the us)
    (see here:
    and also I think that a GREAT start on redoing the energy/green jobs in the country would be if we expand the eisenhower highway system with MASS (and HEAVY) transit down the center of ALL those highways! (See here:

  26. Charles

    Dave Johnson, I offer you facts, you offer me bulls–t.
    This is not a fair trade.
    Either provide a link to economic analysis on the fiscal multiplier effect of tax cuts and evidence that Republicans have not exercised veto power over attempts to fix California’s problems or expect to be laughed at.

  27. Ben


    Yikes! I am all for green jobs and bolstering employment, but this goes a bit far even for me.

    My experience in the automotive industry taught me that car companies change at a glacial pace. Pumping out new car lines and revamping engines cost insane amounts of money. Reworking a production line means literally ripping massive pieces of machinery out of the ground and rearranging them. Decisions go through a mind numbing series of discussions and committees before implementation.

    Can you explain how government control of the American auto industry will improve the situation. What goal would be achieved that straight welfare could not? At least with welfare you avoid spending money on materials for mountains of unwanted cars.

    (Yes, I fully realize our more conservative friends are likely LOL at the thought of welfare being a cheaper alternative to anything)

  28. Dave Johnson

    Anonymous at February 17, 2009 05:14 PM
    My kid races motocross. Found it here.
    Small cc bikes banned! – Your action needed NOW.
    I do not get to hear Rush much. I can say he would be a better President then what the voters stuck us with in Obama, Hillary or McCain.
    Where voters find these people to lead them to the ash heap of Big Government I will never know.

  29. Dave Johnson

    Do you live in California? I do and have sense I was two years old in 1964.
    I am not going to do your home work for you. Guys like you could be beaten over the head with facts and it would not matter a lick.
    Here is a California problem the media will never tell you. Each year California spends 5 Billions Dollars on illegal aliens. A year here and a year there. Soon you are talking about some real problems.
    My personal CPA is a State Auditor in his day job. Get to know your States auditors and you will get the good stuff on where your tax dollars go.

  30. Dave Johnson

    You want facts? Could Obama and democrats mess up sh;t sandwitch? I would say yes but you decide. — Wal-Mart, the worlds largest retailer, beat expectations after its US discount stores accounted for about 50% of all US retail growth during 2008 while its full-year global sales passed $400 billion for the first time (see chart above), and profits hit $13.4 billion.
    The U.S. economy is headed for two quarters of negative growth in the first half of 2009, according to 43 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters project that real GDP will contract at an annual rate of 5.2% in the first quarter and 1.8% in the second quarter of 2009. The survey participants expect economic recovery to begin in the third quarter of 2009. On a year-over-year basis, growth is expected to be -2.0% in 2009 and 2.2% in 2010.
    Markets Are Working: CA Home Sales Increase +85% in December As Home Prices Fall By -41.5%
    California Association of Realtors reported
    Floridas existing home sales rose in December, making it the fourth consecutive month that sales activity demonstrated gains in the year-to-year comparison, according to the latest housing data released by the Florida Association of Realtors
    And democrat Health Care.
    BBC NEWS — Millions of people in England have resorted to do-it-yourself dentistry, a survey by consumer magazine Which? suggests. Since a new dental contract was introduced in 2006 there has been growing concern over access to care.

  31. Dan Weber

    As a general observation, having debated things for many years on the Internet, when you are too concerned with proving your tribe correct and the other tribe incorrect, your ability to find the truth falls dramatically.

  32. Kenny Hatcher

    This whole stimulus bill is ridicules. It does nothing to create long term jobs. These are all short term projects that they want to do. What are all of these people working on these projects going to do once everything is fixed? They will be jobless without any where to turn and the economy will go back down. If we are going to throw money around, lets throw some into creating jobs outside of the government. One job resource that could use a jolt of life is our manufacturing industry. I was reading articles over at about how much of this problem could have been avoided if we had not outsourced all of our manufacturing to China. We need to stop relying on the government to bail us out and start bailing each other out. If we support companies that employ Americans then maybe they will not move to China.

  33. Martin Lin

    Is a fiscal impulse to GDP ratio of 2.5 small or large? What is the standard?
    What is a multiplier?
    Sorry asking what may well be elementary questions, but the possibility that they will be answered poses too great a temptation.

  34. Menzie Chinn

    Martin Lin: 2.5% is small given central tendency in forecasts of the output gap absent policy changes.

    A multiplier is &partial;Y/&partial;G when Y is real GDP and G is government spending on goods and services. For what is a reasonable range of estimates for multipliers, see this post.

  35. PQuincy

    Dave Johnson asks: “Should Obama pick Americas winners and losers though his targeting?”
    As though the Bush tax cuts, whose emphasis on limiting dividend and capital gains taxes along with decreases in the higher marginal rates, didn’t “pick winners and losers.”
    Government action, whether changing tax rates and laws, spending, or borrowing, has effects that are differential. Since Reagan, we’ve had 25 years of effects that enormously favored high earners, and especially investors and corporations. Now, a new administration proposes to let some of the most extreme differential effects to expire, and to shift government spending in ways that have more benefits for the ‘middle-class’ (loosely defined), and you complain that they are ‘picking winners and losers’. Well, it’s about time they _adjusted_ the balance among winners and losers!

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