Did the Stimulus Work?

A common refrain among administration apologists is "The Stimulus Worked!". But did it? Or perhaps the question is has Keynesianism, the policy of deficit spending during recessions to kick-start the economy, worked? Remember, the linchpin of Keynesian economics is the multiplier effect, whereby a dollar of government spending results in greater than $1 of economic growth, because this dollar is further spent by those who receive it. Thus, it is argued, deficit spending is worth it because it more than makes up for itself in an even larger economy. Proponents are quick to point out that tax cuts are a very inefficient form of stimulus because the multiplier effect of tax cuts is less than 1 (because they tend to get saved rather than spent). The ideal approach is to put money directly into workers' pockets via jobs programs.

So how have these big deficits we've been running up worked out? Well the Treasury Dept. is kind enough to provide us with the monthly deficit going back to 1980. So, we can compare the amount of deficits we have run up during recessions compared to size of the subsequent recovery. As everyone knows, we've been out of the recession since June 2009, so this humdinger of a recovery surely must be well worth those deficits.

We also had a really big recession back in the 80's, along with unprecedented deficits that people were screaming about (though back then it was the Democrats complaining because the president was a Republican and the deficits were caused by tax cuts, not spending). And since those tax cuts were responsible for the deficit, then we should expect that recession's recovery to be less impressive compared to the deficits.

So, to that end, I compared the cumulative increase in GDP from the start of the recession out 12 quarters for the 1981/82 recession compared to the recent 2008/09 recession (December 2010 marks the 12th quarter since the recession started) and the accumulated deficits run up during those 12 quarters. I calculated the amount of recovery purchased, in effect, by each dollar of deficit spending.

The results make it awfully hard to argue that deficit spending in this recession has been successful. In fact, as of 12/2010, each dollar of deficit spending has only purchased 17 cents of recovery, as opposed to the early 80's where there was $1.70 of GDP growth for each dollar of deficit.

Indeed, forget the deficit - the entire growth in GDP since the recession began - $579 billion, is considerably less than the size of just the Stimulus itself - $862 billion. There's no way to sugar coat it - the Stimulus was an abject failure.

Data reviewable here.