Wednesday, January 05, 2011

Diagram of the Day

From Stanford University econ prof John Taylor's Economics One blog:
Data from the Department of Commerce show that short-term stimulus funds did not go to increase federal purchases, or state and local purchases, or even consumption purchases by much over the past few years. Thus the packages did not materially stimulate GDP or employment. . .

Unfortunately, most Keynesian models have been not adjusted to incorporate these facts, so they keep making the same predictions. . .

Another example of the problem with the modeling assumptions is the multiplier from "general aid to state governments," which is assumed to be 1.36 in the Zandi model. Yet the Commerce Department data are very clear that virtually none of this aid to state governments in the 2009 stimulus (ARRA) went into government purchases; most went to reduce borrowing. Here is a diagram from the Commentary article which shows this. You cannot get a multiplier of 1.36, or even much greater than zero, when none of the funds went to government purchases and more than half went to reduced borrowing.


(via Veronique de Rugy at The Corner)

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