Less than half the ARRA bailout money has been spent or is in the process of being spent. Despite that, some economists now estimate the recession ended in May. How can we explain this?
A new analysis of fiscal policy multipliers might help.
For the US, we find the impact multiplier is 0.64 and the long-run cumulative multiplier is 1.19. While these estimates are certainly closer to Romer?s than to Barro?s, they mask some important structural changes over the sample period. When estimating the multipliers for the pre-1980 period, we get considerably larger numbers than the post-1980 multipliers. The post-1980 multipliers are just 0.32 on impact and 0.4 in the long-run. This is certainly a far cry from the impact multiplier (1.05) and long-run multiplier (1.55) used in the Romer report. [links added]
So even the most optimistic short-run impact of the $787 billion ARRA bailout bill was that GDP would increase five percent more than the government spent ($826 billion). Barro estimated no impact as government spending is entirely at the expense of private saving. Izlietzki, et al., figure it somewhere between one-third and two-thirds of the amount spent by government with recent history suggesting the lower number.
This means that for every three dollars the government spends to stimulate the economy, the private sector would have spent two dollars anyway. Maybe it’s a good thing the stimulus spending has been slow, and we have yet another reason to consider postponing the rest of the bailout spending.
