The Stimulus That Wasn’t There

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Frank Aquila’s Businessweek piece on what Ben Bernanke could learn from Ben Bernanke’s academic work is pretty informative and I hope it sways the views of America’s executive class. But I’m afraid that his throwaway line about fiscal policy, catering as it does to the pre-existing prejudices of said class, will lodge more deeply in their mind: “Even with massive Keynesian pump-priming, economic growth has been far weaker than the typical postslump rebound.”

It can’t be emphasized enough that there simply was not a massive fiscal pump-priming in a macroeconomic sense. Instead what happened is that the declining economy led to massive cutbacks in expenditures by state and local government, and the American Recovery and Reinvestment Act largely-but-not-entirely offset those cutbacks with an increase in spending at the federal level. ARRA was, as a piece of legislation, a fairly massive set of policy initiatives. But we simply didn’t try to stage a massive increase in government purchases to offset the fall in consumer spending and business investment. Instead we organized an increase in federal purchases to offset the fall in state and local purchases.