Finally, here's a glimpse (via Krugman) at how England's output indices are fairing compared with the rest of Europe. If you can't read the graph, just know that the blue line is England. As of Jan 2009, the horses appear to be running in this order: UK, France, Germany, Italy, Spain.
Well
so much for that. In the third quarter of 2009, the UK dipped further
into recession than almost any country in the industrialized world.
Does that mean fiscal stimulus bills don't work? Not exactly.In September the Council of Economic Advisers picked up exactly this question and concluded that there was statistically significant evidence that: "All the countries that did very large stimulus (over 2.3 percent of GDP) saw surprisingly strong growth when measured with respect to either private sector forecasts or simple time series forecasts." It should be noted that the US stimulus was, by the CEA's estimate, 2.0 percent of GDP.
The Council offered some graphs to show the relationship between stimulus amounts and GDP recovery in OECD countries. I think this graph is the most telling because it looks at the relationship between each country's stimulus and their economic performance but also it controls for tax share. What does that mean? It means it accounts for countries that, in addition to stimuli, spent extensively through automatic stabilizers like welfare and unemployment insurance, which helps explain the smaller stimulus in France and Norway.
What this graph cannot do is to look under the hood of these stimulus programs and figure out what kind of stimulus correlates with higher growth: tax cuts; federal spending; tax credits for companies; etc. The evidence in the report is merely anecdotal. It seems that something like Cash for Clunkers worked well in Germany. Turning inventory in Korea has helped that economy recently. Public investment in construction appears to have helped Japan's economy. But the problem with judging the stimulus plans is that we're comparing 2009's "stimulated" third quarters to past projections of 2009's "unstimulated" third quarters. This is tricky. It's a bit like getting sick and, after two weeks of medicine, comparing your current health to a health projection you made two weeks ago.
What we do know is small and limited. The CEA can spot a slight positive correlation between high stimulus spending and recovery and credits the stimulus with adding about 3 percent to Q2 and Q3 GDP in the United States. Here's what we also know. Unemployment is higher now than the administration projected in its no-stimulus scenario earlier this year, and even the CEA expects it to stay at this level throughout 2010. Whether or not it is fair to judge the success of the stimulus remains a matter of debate, I suppose. But the American people will judge the economy in one year anyway, and if unemployment is as high as the CEA projects, you can bet the last thing Obama will stimulate is the Republican Party.
Thank you for this update. All your caveats are correct-- for example, Canada was much less affected by the crisis, so their relatively poor performance this year is more understandable and driven by their neighbors (and their decrease in GDP from expectations partially affected by commodity prices too).
The caveats applied back in June, though, which is why I thought your post then was a bit too hasty.
Fiscal stimulus works in a short run, but it's not clear that it's worth it in the long run, particularly if it's spent in inefficient ways. In the case of the US's stimulus in one sense we're "lucky" that the crisis was somewhat worse and longer-lasting than expected, since the stimulus wasn't really spent quickly enough-- you don't want to borrow for a short-term stimulus spent once recovery has started. OTOH, perhaps if it were spent more quickly the recovery would have started sooner. Hard to say.
But economic stimulus should work in one year. If it takes much longer than that, it's either long-term spending, or else the stimulus was ineffective. That's a completely valid criticism; that the stimulus should have come faster.
Certainly the pro-stimulus people will argue that that would mean that the stimulus should have been larger as well as faster, but I don't think any economist would argue that fiscal stimulus should take more than a year to have an effect. Stimulus is by definition short-term, to bring up aggregate supply and demand up to potential levels by taking on long-term debt.
"What we do know is small and limited. The CEA can spot a slight positive correlation between high stimulus spending and recovery and credits the stimulus with adding about 3 percent to Q2 and Q3 GDP in the United States."
I would not describe an OLS result that is significant at the 95% level as a "slight positive correlation." And the CEA's VAR estimates of the stimulus' impact are in the middle of a rather tight range of similar estimates by J.P. Morgan Chase, IHS Global Insight, Moody's economy.com, Macroeconomic Advisers and Goldman Sachs. We actually know a lot more than you imply.
Remember, although in retrospect Romer's baseline economic projection was wildly optimistic, she wanted a stimulus that was 50% larger than originally proposed. The proposal was a carefully crafted blend of short term and long term spending, that would achieve maximum impact after only 6 quarters. The thinking at the time was that monetary policy would acquire traction by then, but now it appears that it may be much further off (2012?).
The stimulus was watered down by the Senate centrist's insertion of a large, ineffective and untimely AMT patch. Nevertheless, apart from that, it is proceeding at a remarkably steady pace of $100 billion in direct spending and tax expenditures per quarter, and as measured by the VAR estimates, is largely working as planned. At the very least it has temporarily prevented what would could have been characterized as a second great depression. If only it had been larger.