Because the ARRA grants to state and local government are fungible and notsynchronized with purchases, determining the effect of ARRA on state and local government purchases is more difficult and uncertain than determining the effect on federal government purchases. We therefore analyze the state and local purchases data in detail. We also consider counterfactuals, trace where the money went, and estimate time-series regressions of the relationship between ARRA grants and state and local government purchases. Our main finding is that the increase in government purchases due to the ARRA has been remarkably small, especially when compared to the large size of the overall ARRA package. In fact, the effect of ARRA on purchases appears to be so small that the size of the government purchases multiplier does not matter much compared to many other factors affecting the growth of GDP.
1. Taylor and Cogan are incorrect in their main claim. In fact, government purchases were much higher than they would have been in the absence of the stimulus.
2. Taylor and Cogan are correct, but the multiplier is actually quite high for transfer payments, tax cuts, and substituting Federal for state and local borrowing.
3. The CBO, Blinder-Zandi, and everybody else simply cranked out their models under the assumption that the stimulus increased government purchases of goods and services, heedless of the facts. Their assertions that the stimulus helped with output and employment are false, even by Keynesian standards, because of this incorrect assumption.
My take is that a combination of Kling’s explanations likely occurred and there were probably other factors that either did or did not render the stimulus more or less effective.
All in all, though, the Taylor-Cogan analysis provides a sobering example of how futile are the attempts of a central government to order a complex economy.