Net 2009 US fiscal stimulus: $0

[Surlethe]

NBER paper

Apparently, the federal stimulus spending was just barely enough to make up for collapsing state spending. Better than where we'd otherwise be? Yes. Actual stimulus effect? Maybe not as much as we thought.

Relevant quote:

We show that, statistically, the federal expenditure stimulus compensated for the fifty
states’ negative stimulus due to collapsing state expenditures. The sum of the federal (positive)
and states (negative) fiscal expenditure stimulus, however, is close to zero.

If there's demand (is the pdf unavailable to people without institutional access? I get it through my uni) I can PM copies or copy-paste the paper. Here's the introduction, bereft of references and footnotes.

The financial crisis of 2008-9 led to a massive bailout of the financial system, and significant
fiscal stimulus by the United States federal government. Despite this massive stimulus,
unemployment reached two digit figures, leading some observers to question the efficacy of
fiscal policy. Moreover, recent research raised questions with respect to the fiscal multiplier in
the US, as well as about possible adverse effects of higher future debt overhang.3 Given that the
counterfactual of the performance of the US economy in the absence of the fiscal stimulus is
hard to ascertain, one may thus question its effectiveness, and hence the logic of continuing it.

The purpose of this paper is to examine whether there was net fiscal expenditure stimulus
in the U.S. during the crisis. First, we analyze the patterns of fiscal expenditure of the federal
government, the state and the local governments, and the consolidated fiscal expenditure. We
distinguish between the “pure fiscal expenditure” and the published total expenditure. The “pure
fiscal expenditure” or simply, fiscal expenditure of the textbook variety is defined as the sum of
government consumption and government gross investment whereas the published total
expenditure equals this pure fiscal expenditure plus transfers. Excluding transfer payments (i.e.
net of the transfers to financial sector and automatic stabilizers like higher unemployment
benefits that were a consequence of the higher unemployment levels) allows us to consider the
impact of the policy driven or discretionary fiscal stimulus.4 That is, the total consumption and

This observation does not negate the possible benefit of stabilizing the financial system by
means of federal bailouts. Yet, focusing on the liquidity transfer to collapsing financial institutes
does not amount to net fiscal stimulus that increases the fiscal expenditures in ways that
compensate for the impact of borrowing constraints on state and local governments. This
gross investment levels are the government expenditure levels relevant for computing the
Keynesian fiscal multiplier. While a large literature defines countercyclical fiscal policy as one
with positive correlation between fiscal surplus and output, we focus on actual government
spending. We agree with Kaminsky, Reinhart and Vegh (2004) that one needs to focus on
government instruments to smooth business cycles, not on outcomes like fiscal deficit, that are
endogenous. For example, the government may be raising tax rate in the recession and cutting
expenditure, yet running a fiscal deficit because the tax base is smaller. As we will see below,
identifying fiscal stimulus with fiscal deficits during recession may mask actual policy stances.

We show that, statistically, the federal expenditure stimulus compensated for the fifty
states’ negative stimulus due to collapsing state expenditures. The sum of the federal (positive)
and states (negative) fiscal expenditure stimulus, however, is close to zero. We close with a
discussion of possible obstacles for net expenditure stimulus in a federal system, and propose
ways to ameliorate some of these concerns, relieving some of the handicaps of net fiscal
expenditure stimulus in a federal system.

[J]

If there's demand (is the pdf unavailable to people without institutional access? I get it through my uni) I can PM copies or copy-paste the paper. Here's the introduction, bereft of references and footnotes.

I can't get to it, and would like to see the full paper so I have an idea of what they're counting as stimulus. I get the impression that the AIG bailouts & so forth aren't included and it's only the direct stimulus programs. I'd like to see the full details & breakdown in the paper.

[Surlethe]

That's correct - transfers, both to the financial industry and in the form of greater unemployment insurance expenditures, were not counted. They're trying to isolate the effects of discretionary fiscal stimulus.

Here's the (largely unbeautified) paper, not including the introduction posted above:

the predicted level. Moreover, even this limited impact may now be over.
To summarize, our results indicate that, so far, the federal fiscal expenditure stimulus has mostly
compensated for the negative state and local stimulus associated with the collapsing tax revenue
and the limited borrowing capacity of the states. While this is a significant accomplishment, the
net effect is that the consolidated fiscal expenditure stimulus is small, at a time when the private
sector’s deleveraging has reduced private consumption. Thus, the fiscal expenditure stimulus did
not manage to provide a viable cushion for the negative stimulus associated with private sector’s
declining demand. The next section discusses the possible challenges associated with delivering
a net fiscal stimulus in the US.

2. Obstacles for net stimulus
The case for net stimulus in the US is debatable. On the one hand, if the US is already in
a robust recovery, as is presumed by more optimistic observers, then net fiscal stimulus may be
redundant, and could lead inflationary pressure down the road.9 On the other hand, double digit
unemployment, and uncertainty regarding the strength of the recovery, may suggest the need for
a second US federal fiscal stimulus package. Independently of this debate, understanding the
reasons for the lack of greater net fiscal expenditure stimulus in the aftermath of the deepest
recession of the last fifty years is essential. One explanation is provided by the moral hazard
concerns associated with common pool challenges of a fiscal union. Another explanation for the
lack of a larger stimulus is that the present trajectory of the US public debt/GDP, in the absences
of concrete plans for fiscal consolidation, is a cause for concern. We close the paper with a
discussion of these issues.

The limits on state borrowings in a federal union may be rationalized by the concern that
the absence of such limits may induce competitive borrowing by states, expecting the federal
government to bail them out in due course.10 This is an important concern in a highly centralized
federal union, where most of the tax revenue is ‘owned’ by the federal government (von Hagen
and Eichengreen, 1996). There is also the apprehension that transferring federal resources to
states with deeper tax revenue shortfalls would ‘reward’ states that were less prudent, and
penalize states that designed a more stable tax base and a precautionary pool of ‘saving for the
rainy day’ in good times in order to provide the cushion for bad times.

While this moral hazard concern is important, in principle one could design a federal
stimulus program that would involve transfers to states but would not reward states that had
made past fiscal mistakes. For example, this can be done by channelling funds to states on a percapita
basis, such that each state gets an allocation proportionate to its population, and as long as
the state government is committed to spend these funds and not use them to repay past debt. One
may also expect that the equitable per capita treatment of this scheme would facilitate greater
support for the net fiscal expenditure stimulus by the Congress. Under this scheme, the federal
government borrows for the states, in a way that equalizes the borrowing per-capita,
independently of the quality of the domestic public finance mechanism of each state.11
Another concern restraining public support for greater federal stimulus may be the long
run implications of a net stimulus, i.e. increasing the future debt overhang. Observers noted that
even before the crisis, the public debt trajectory was unsustainable, and fiscal reform was needed
(see Auerbach and Gale, 2009). Recognizing the gravity of the recession induced by the
financial crisis may call for coupling any federal fiscal stimulus with outlining a credible
medium term plan for fiscal consolidation. In fact, independent of the fiscal stimulus triggered
by the great recession, concerns about the future path of the public debt/GDP remain a serious
policy challenge for the US.

References
Aizenman, Joshua (1992) “Competitive externalities and the optimal seigniorage” Journal of
Money, Credit & Banking, 61-71.
Auerbach, Alan and William Gale (2009) “An update on the economic and fiscal crises: 2009
and beyond,” (October), Brookings Papers.
Clemente, Jesus, Antonio Montanes and Marcelo Reyes (1998) "Testing for a unit root in
variables with a double change in the mean," Economics Letters, Elsevier, vol. 59(2),
pages 175-182, May.
De Resende, Carlos, René Lalonde, and Stephen Snudden (2010) “The power of many: assessing
the economic impact of the global fiscal stimulus” Bank of Canada Discussion Paper No.
2010-1.
Kaminsky, Garciela, Carmen Reinhart and Carlos Vegh (2004) “When it rains, it pours:
procyclical capital flows and macroeconomic policies” in NBER Macroeconomics Annual,
Mark Gertler and Kenneth Rogoff, eds., Cambridge, MA: MIT Press.
von Hagen, Jürgen and Barry Eichengreen (1996) “Federalism, fiscal restraints, and European
Monetary Union” The American Economic Review, Vol. 86, No. 2: 134-138.
Monacelli, Tommaso, Roberto Perotti and Antonella Trigari (2009) “Unemployment and fiscal
multipliers” manuscript, Bocconi University.
Phillips, Peter C.B and Pierre Perron (1988) "Testing for a unit root in time series regression",
Biometrika, 75, 335–346.
10
Said, Said E. and David A. Dickey (1984) “Testing for unit roots in autoregressive moving
average models of unknown order”, Biometrika, 71, p 599–607.
Spilimbergo, Antonio, Steve Symansky and Martin Schindler (2009) “Fiscal multipliers” IMF
Staff Position Note, SPN/09/11.
The Economist (2010) “Greece and the euro,” Feb 18th 2010.
Tornell, Aaron and Philip R. Lane (1999) “The voracity effect” The American Economic Review,
22-46.

Maybe I can post the figures later.

[hunter5]

Isn't there still at least a third of the money left? And havent most of the banks that took TARP money paid the loan back.

[J]

That's correct - transfers, both to the financial industry and in the form of greater unemployment insurance expenditures, were not counted. They're trying to isolate the effects of discretionary fiscal stimulus.

Is that even possible? There's literally trillions of dollars which were pumped into the economy sloshing around in all sorts of unknown & unpredictable ways, how would they go about isolating the effects of the direct stimulus programs?

This section is a big "no duh!"

To summarize, our results indicate that, so far, the federal fiscal expenditure stimulus has mostly
compensated for the negative state and local stimulus associated with the collapsing tax revenue
and the limited borrowing capacity of the states. While this is a significant accomplishment, the
net effect is that the consolidated fiscal expenditure stimulus is small, at a time when the private
sector’s deleveraging has reduced private consumption. Thus, the fiscal expenditure stimulus did
not manage to provide a viable cushion for the negative stimulus associated with private sector’s
declining demand. The next section discusses the possible challenges associated with delivering
a net fiscal stimulus in the US.

And it can't, deleveraging has and will continue to destroy trillions of dollars. Not even the government can borrow & hand out that kind of money on a sustained basis, it cannot replace private consumption though Geithner & Bennie seem to think so.

Isn't there still at least a third of the money left? And havent most of the banks that took TARP money paid the loan back.

Yes, and yes, technically. The banks paid back TARP using money which was backdoored to them via AIG and Treasury auction buybacks. In short, the Fed printed up a stack of bills and/or sold a bunch of T-bills, then gave the money to banks which they then used to pay back TARP.

[KrauserKrauser]

Don't forget the part where they were able to pocket billions in interest to artificially inflate their recent earnings statements.

Can't let that little gem escape unseen.

[Surlethe]

Is that even possible? There's literally trillions of dollars which were pumped into the economy sloshing around in all sorts of unknown & unpredictable ways, how would they go about isolating the effects of the direct stimulus programs?

This section is a big "no duh!"

Sure it's possible; you suppose there wasn't stimulus, plug it into your favorite model, and compare the outcomes. That's how Obama & Co and the CBO are calculating "jobs saved or created".

And it can't, deleveraging has and will continue to destroy trillions of dollars. Not even the government can borrow & hand out that kind of money on a sustained basis, it cannot replace private consumption though Geithner & Bennie seem to think so.

I think you're not making a distinction between flow variables and stock variables. Deleveraging will certainly destroy trillions of dollars, but that will indirectly impact production by decreasing private consumption. If it wants to replace private consumption, the amount of money the government hands out doesn't need to be comparable to the loss of wealth from deleveraging; it only needs to be comparable to the decrease in private consumption caused by the loss of wealth.

[J]

Is that even possible? There's literally trillions of dollars which were pumped into the economy sloshing around in all sorts of unknown & unpredictable ways, how would they go about isolating the effects of the direct stimulus programs?

Sure it's possible; you suppose there wasn't stimulus, plug it into your favorite model, and compare the outcomes. That's how Obama & Co and the CBO are calculating "jobs saved or created".

Ah yes, those models. Like the one which claimed unemployment wouldn't break 9% with or without the stimulus.

I think you're not making a distinction between flow variables and stock variables. Deleveraging will certainly destroy trillions of dollars, but that will indirectly impact production by decreasing private consumption. If it wants to replace private consumption, the amount of money the government hands out doesn't need to be comparable to the loss of wealth from deleveraging; it only needs to be comparable to the decrease in private consumption caused by the loss of wealth.

If it were 30 years ago you'd be right, however, since we've since invented wonderful financial tools such as HELOCs and all sorts of asset based credits (which spend just like money) for everyone, the effect is that the stock becomes the flow to a rather large extent. 30 years ago a 30% decline in housing prices wouldn't put much of a dent in consumer spending, and a person's home doubling in price over the course of 10 years wouldn't make him spend like a millionaire since the value of the home cannot be quickly & easily converted into liquid cash or credit. The homeowner would need to sell his home and find a new dwelling before he can realize the gains and spend them, which limits the house as ATM to a few speculators.

In recent times it's trivial for a homeowner to convert housing price appreciation into spendable cash for use in private consumption, countless millions of homeowners did so, however, this also goes the other way. For instance let's assume home prices are increasing on average by 8% a year, a homeowner can re-fi or HELOC his home to convert that appreciation to spendable cash with one quick visit to the bank. As long as home prices continue rising he he can continue using his home as a money tree. A housing price decline puts the mortgages underwater and shuts off the house as an ATM, which instantly bleeds over and kills consumer spending.