Did the Stimulus Work? A Review of the Nine Best Studies on the Subject

This is a VERY long article covering all nine studies. Here is the link.
http://www.washingtonpost.com/blogs/...g.html?hpid=z4

The final conclusion of the article: " I'm Inclined to believe that the preponderance of evidence
indicates the stimulus worked."


Did the stimulus work? A review of the nine best studies on the subject
By Dylan Matthews


If you ask the Obama administration, economists are virtually united in thinking the 2009 stimulus package worked. “I’m absolutely convinced, and the vast majority of economists are convinced, that the steps we took in the Recovery Act saved millions of people their jobs or created a whole bunch of jobs,” Obama declared at a press conference last month. Or, to quote NEC chair Gene Sperling from an interview a few weeks ago, “There is no question that the evidence is showing that the type of things the president did to help state and local governments really mattered, were really helpful in pulling us from the brink of depression to a recovery.”

But the stimulus’ critics allege that this evidence isn’t reliable. The studies the administration is relying on depend on models that “substitute assumptions for identification,” Harvard economist Robert Barro writes today in the Wall Street Journal. “To figure out the economic effects of transfers one needs ‘experiments,’” Barro writes, “in which the government changes transfer in an unusual way—while other factors stay the same—but these events are rare.”

The truth is, both studies of the type Barro prefers, and studies using models, which he criticizes, have been conducted to determine the effect of the stimulus on employment and output. Of the nine studies I’ve found, six find that the stimulus had a significant, positive effect on employment and growth, and three find that the effect was either quite small or impossible to detect. Five studies use econometric ”experiments,” which attempt to, as Barro encourages, sort out the effect of the stimulus from other factors using empirical data. Four use modeling instead.

Each approach runs into its own set of problems. The econometric studies have to deal with what social scientists call “endogeneity”: that is, the variable whose effect we’re trying to determine (the stimulus) could itself be affected by what we’re trying to study its effect on (the state of the economy). In this specific case, this means that econometric studies sometimes have to correct for the fact that harder-hit areas tend to get more stimulus spending. This says nothing about the stimulus’ effectiveness, but it can confuse attempts to evaluate that effectiveness statistically.

All of these studies have their own methods of overcoming the endogeneity problem, some of which are more effective than others. Whichever corrections one uses, however, one cannot run a perfect experiment with messy, real-world data, which necessarily limits what these studies can say. Of the five econometric studies detailed here, three conclude the stimulus had a significant positive effect, and two conclude it did not have much of an effect at all.

The modeling studies use an equation or series of equations meant to model the economy to compare the results of a certain policy change (like the stimulus bill) against the results of a baseline in which the change was not enacted. This avoids the messiness of econometric evaluation, as it allows the creation of a ready, stimulus-less counterfactual with which one can compare the results of the stimulus bill. But it also doesn’t take into account the actual changes in employment and output that occurred after the stimulus was passed. Further, there is considerable disagreement within the economics profession about macroeconomic modeling, and for any of these studies, one could find economists who dispute the value of the model used. Of the four modeling studies, three conclude the stimulus had a significant positive effect, while one suggests it had a positive, but mild, effect.

One more technical thing to clear up before we delve into the studies. Many of these studies provide estimates of the “multiplier” of a particular kind of stimulus measure. The “multiplier” of a given program is the amount GDP is increased by one dollar of that type of spending. For example, one of the econometric studies estimates that the multiplier for the Medicaid aid to states included in the stimulus is 2. This means that for every dollar the stimulus spent on Medicaid, GDP increased by $2. Any positive multiplier indicates the program is stimulative, but the higher the multiplier, the more cost-effective the measure is.

Here are the nine studies, organized by the conclusion and method used. Click on each one to see my summary of the study, how it reached its conclusions, and potential problems with its approach.

It worked (econometric):

Feyrer and Sacerdote.
Chodorow-Reich, Feiveson, Liscow, and Woolston.
Wilson.
It worked (modeling):

Congressional Budget Office.
Council of Economic Advisors.
Zandi and Blinder.
It worked a little bit (modeling):

Oh and Reis.
It didn’t work (econometric):

Conley and Dupor.
Taylor.

Study: ”Did the Stimulus Stimulate? Real Time Estimates of the Effects of the American Recovery and Reinvestment Act.”

Who did it: James Feyrer and Bruce Sacerdote, Dartmouth College.

What it says: The stimulus had a positive, statistically significant effect on employment. The effects varied by type of spending. Aid to states for education and law enforcement didn’t have a significant effect, but aid to low-income people and infrastructure spending showed very positive impacts. The multiplier was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and between 0.47 and 1.06 for the stimulus overall.

How it got there: Feyrer and Sacerdote used three broad approaches. The first was to compare employment growth in each state to the amount of stimulus funds spent in that state over the 20 months after the stimulus was passed in February 2009. The second was to conduct that same comparison on a county level. The third was to compare month-by-month employment and spending data in states, to see how employment responds to sudden changes in stimulus spending.

Each approach controls for a different source of bad results. The overall state data controls for national employment shocks, and the county data controls for shocks particular to states. If those controls weren’t included, unrelated increases or decreases in employment at the national or state level could obscure any increases or decreases resulting from stimulus spending, making it hard to determine that spending’s effect. Similarly, the time-series data makes it easier to pinpoint the direct effect of spending, by seeing what happens to employment at the moment spending is introduced.

Potential Problems:
a) Spillover: The study misses “spillover” effects. Thus, it likely underestimates the stimulative impact of the bill slightly.

b) Endogeneity: Some states received more stimulus money, per capita, than others because they were harder hit, which would complicate the study’s interstate comparisons of that spending’s effects. To correct for this, Feyrer and Sacerdote use the average seniority level of states’ House delegations as an “instrumental variable”. That seniority level is highly correlated with the level of per-capita stimulus spending in a state. By including this in their calculations, the study has a way of estimating to what extent states are getting disproportionate funds due to actual economic need as opposed to political patronage, and can thus control for that effect.

Back to the list.
===


Study: ”Does State Fiscal Relief During Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act.”

Who did it: Gabriel Chodorow-Reich (Berkeley), Laura Feiveson (MIT), Zachary Liscow (Berkeley), and William Gui Woolston (Stanford).

What it says: The state fiscal aid portion of the stimulus, which specifically increased federal Medicaid matching funds, had significant positive effects on employment. The additional matching funds increased employment by 3.5 job-years per $100,000 spent, and the multiplier for the funds is around 2.

How it got there: Out of the $787 billion stimulus bill, about $250 billion went in direct aid to state and local governments to prevent them from hurting the economy by cutting spending. Of that, $88 billion went to shore up Medicaid, and of that, $61.2 billion had been spent by the end of June 2010. The per-capita size of the Medicare aid varied widely by state. Utah got $103 per over-16 resident, whereas D.C. got $507. The authors used this variation to calculate the effect of the program by comparing changes in employment per capita in states with high levels of aid to that in states with low levels.

Potential Problems:
a) Spillover: Because it uses state-by-state data, the study does not take into account spillover spending between states.Thus, the stimulative impact of the spending is likely underestimated slightly.

b) Endogeneity: Harder-hit states are likely to get disproportionate funding. To control for this, the authors look at the formula the stimulus bill used in doling out Medicaid funds. The bill increased federal Medicaid aid by 6.2 percent to all states, and by more to states that were particularly hard hit. Thus, the authors surmise, the aid a state received depended on four things: its pre-recession Medicaid spending, the change in its number of beneficiaries during the recession, the change in spending per beneficiary during the recession, and its unemployment rate (which determined whether it would receive aid above the 6.2 percent figure). The authors thus only looked at aid attributed to the first factor, pre-recession Medicaid spending, as this metric is not affected at all by the size of the downturn in a given state.

Back to the list.
===


Study: ”Fiscal Spending Jobs Multipliers: Evidence from the 2009 American Recovery and Reinvestment Act.”

Who did it: Daniel J. Wilson of the Federal Reserve Bank of San Francisco.

What it says: The stimulus created 2 million jobs in its first year, and 3.2 million by March 2011. The jobs multiplier varies widely based on whether one studies stimulus spending that has been announced to go to certain recipients, is obligated to those recipients, or has actually been paid out to those recipients. Estimates vary from 4.8, for one measure based on announced spending, to 25.2, for another measure based on actual payments. Private sector, state and local government and construction sectors all showed consistently significant positive effects, whereas whether the effect on manufacturing, education and health was positive depends on whether one looks at announcements, obligations or payments.

How it got there: Wilson compares stimulus spending and change in employment across states. The spending data comes from the federal government’s reports on stimulus money that has been announced, obligated, and actually paid out to its recipients. The employment data comes from the Bureau of Labor Statistics.

Potential Problems:
a) Spillover: Because it compares between states, Wilson’s study cannot take into account spillover effects. Wilson acknowledges this, but defends by noting that he is calculating the “local multiplier”, as opposed to the national one, and that the local figure is also of interest.

b) Endogeneity: As with any cross-state comparison, the problem arises that harder-hit states are likely to get disproportionate stimulus funds, which can distort results. To take this into account, Wilson looks at three factors that affect the amount of stimulus aid states received, but which were not related to how hard-hit each state was. Specifically, he considers states’ pre-stimulus Medicaid spending, their school-age population (which should help determine how much education aid they receive), and the factors used to determine the amount of highway aid each state received in the stimulus (factors which are unrelated to underlying economic conditions).

However, the latter two factors are only weakly correlated with how much spending each state received, which limits their usefulness to the study. While pre-stimulus Medicaid spending is better correlated, the fact that Wilson uses it to study overall stimulus spending, rather than stimulus spending on Medicaid, limits its usefulness as well.


Much more to this article. Click on link at the top of this thread to read it all.

Four stimulus bills that never were
By Ezra Klein
If you haven’t read Dylan Matthews’ excellent round-up of stimulus studies, go do that. I’ll wait.

Done?

Alright. Those studies are looking at the stimulus we actually had. But in the course of some recent reporting, I’ve heard a lot about the stimuluses -- stimuli? -- we should have had, but didn’t. And I don’t mean the $2+ trillion stimulus we probably needed. Almost everyone agrees that was a nonstarter in Congress. I mean plausible alternative versions of the stimulus we actually had. Here are the four ideas I’ve heard the most about:

The American Recovery Act: Some suggest that the “American Recovery and Reinvestment Act” -- the official name for the stimulus -- should have just been “The American Recovery Act.” That would have meant jettisoning the ambitious projects meant to improve tomorrow’s economy -- high-speed rail, comparative-effectiveness review, updating the energy grid, researching renewables, etc -- and spending that money instead on less-glamorous but quicker-acting policies like tax cuts, state and local aid, and infrastructure maintenance. The upside of this is that the stimulus would have been better targeted to fight unemployment, and fight it fast. The downside is that we would have missed a rare opportunity to make important investments in our future.

The four-part stimulus: Another common complaint is that the stimulus was simply too big and diffuse for Americans to understand, and thus too big and diffuse for Americans to trust. The way to handle that wasn’t necessarily to scale back on its ambitions, but to break it into chunks. One chunk would have been tax cuts, and, with the benefit of hindsight, would have perhaps been a payroll-tax cut, which would have been more visible to ordinary Americans and which had more Republican support. Another chunk would have been state and local aid. Another chunk would have been infrastructure spending. And the final chunk would have been research and education spending. The upside of this is that more people would understand exactly where the stimulus money was going, and the administration would have had more time to craft the research and infrastructure pieces. The downside is that some of the pieces might not have passed.

The automatic stimulus: When the stimulus was being crafted, we didn’t know how bad the recession already was, and most forecasters were overoptimistic about how quickly we would recover. So the idea that we would need more stimulus in years three or four wasn’t given much thought, and insofar as it was discussed in the administration, the prevailing view was that Congress would never let 9 percent unemployment stand and thus would cooperate with efforts to add to the size of the recovery package. Wrong! In retrospect, some say, it would have been wise to fight to tie more of the stimulus -- particularly the unemployment insurance and the Medicaid spending, and perhaps even the tax cuts -- to the unemployment rate, so that the money didn’t stop until the need began to abate. The upside of this is that we would have more stimulus baked into the cake right now. The downside is that it might not have passed.

The deficit-reducing stimulus: The idea behind Keynesian stimulus is that the government balances the budget or runs surpluses in the good times so it has the credibility and fiscal ammunition to borrow and spend during the bad times. The Bush administration governed in mostly good times, but did not balance the budget or run surpluses. So the Obama administration, which entered office facing both deficits and a recession, had less room to maneuver. Some in the administration argued that the stimulus should thus include a significant long-term deficit reduction component. They argued that would help with market confidence, help with public support, and give the administration more space to ask for more if more turned out to be needed. The downside, of course, is that this would have delayed the stimulus and would have layered all the bitter arguments of deficit reduction -- what to cut, how much to tax, etc -- atop the stimulus, which could have collapsed the whole effort.

My own view is that there’s a good argument for all of these alternatives, but the marginal difference they would have made, both in terms of the politics and the economics, is generally overstated.

For the rest of the article click on this link:http://www.washingtonpost.com/blogs/...g.html?hpid=z4

Hmmmm, then you must be in favor of tax breaks. Seems contrary to previous posts.............

Thats what you got out of that entire article? Figures. Lol
Your really should read it. Its quite thorough and informative.

I'm always praising Obama's middle class tax cuts and supported the continuation of payroll tax cuts.
I think you must be thinking of someone else. :)

This article is more important reading then some of our back and forth silliness.

Here it is again.
http://www.washingtonpost.com/blogs/...g.html?hpid=z4

I read the two studies that said it didn't work lol. Plus the one that said it worked very little. Given the current state of the economy, I would have to agree with those studies.

Did you read the critique of those studies and point of view as well. Did you read the final conclusion of the author. Seems fairly objective.

"I'm inclined to believe that the preponderance of evidence indicates the stimulus worked".
You clearly would NEVER believe stimulus would EVER work. Hence your support of Schiff and
Austrian school of economics.

You should really read the whole article. I seem to remember somewhere that you argued that reading Schiff was all about
learning. So it seems there is a slight slant to your learning. lmfao

I did read the whole thing. You really have to click the link to get it though. Reprinting it lost all the formatting which is important to the article.