Want more proof that the federal stimulus packages approved during the final year of the Bush administration and the first year of the Obama regime failed?
Stanford professors John F. Cogan and John B. Taylor offer it in the latest Commentary. (You?ll find a subscriber link here.)
Among Cogan and Taylor?s most interesting findings: Federal stimulus dollars aimed at state and local governments simply propped up those governments. (That finding sounds familiar.)
From the enactment of the stimulus in March 2009 to the third quarter of 2010, a total of $173 billion was issued to state and local governments. The principal purpose of these grants was to provide state and local governments with additional funds to enable them to boost their purchases of goods and services in tandem with federal purchases. ?
As federal stimulus grants flowed into state- and local-government treasuries, borrowing by these same governments declined steadily. Instead of issuing more debt, state and local governments used most of the federal stimulus grants to finance their expenditures. To put it another way, the federal government borrowed funds from the public and transferred these funds to state and local governments, which then used the funds mainly to reduce borrowing from the public.
Here?s a synopsis of Cogan and Taylor?s overall findings:
To sum up: the federal government borrowed funds that it mainly sent to households and to state and local governments. Only an immaterial amount was used for federal purchases of goods and services. The borrowed funds were mainly used by households and state and local governments to reduce their own borrowing. In effect, the increased net borrowing at the federal level was matched by reduced net borrowing by households and state and local governments.
So there was little if any net stimulus. The irony is that basic economic theory and practical experience predicted this would happen.
