Jeffrey Sachs in yesterday’s FT A-List argues that “spending has been sizeable…the structural fiscal expansion was more than 4 per cent of GDP on a sustained basis during 2009-11… Fiscal stimulus, in short, has been tried, but did not succeed in spurring a robust recovery.”
But reading further into why this fiscal effort failed, he notes that (my highlights):
* the housing slump was deep and chronic
* the tax cuts and transfers, advertised as temporary, were partly/wholly saved or used to repay debt
* state governments took federal money and then proceeded with layoffs and investment cutbacks.
“There was no rise in overall government investment (i.e. federal, state, and local) spending as a share of GDP. The stimulus was almost all in the form of tax cuts and transfer payments rather than outlays for investment projects.”
In other words, this is mostly consistent with my earlier Economonitor post, which looked at the overall government spending and investment contribution to GDP, at all levels. The deficit is not the right measure of stimulus, and neither is simple federal spending — even the headline stimulus number is a gross number, which because it was badly designed had very little impact on the economy, though it would have been worse to do nothing. Sachs is right on the money that long-term growth from technology, a mix of private and public investment, and a broader tax base are needed. Translation: give the economy a long-term “Keynesian” boost, through tax-and-invest rather than short-term and less effective (lower-multiplier) tax-cut-and-spend. But I’m unconvinced that a well-designed, large stimulus wouldn’t have left the country better off, and that it is already too late to do it. Still, we’re more likely to see austerity via the “fiscal cliff” of stimulus expiration, rather than a Keynesian or a Sachsian program large enough to help us leave the recession.