John F. Cogan and John B. Taylor write,

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.

The stimulus consisted of over $800 billion in Federal government spending. However, Taylor and Cogan find that the increase in Federal government purchases due to the stimulus was small. Moreover, they argue that the effect of the stimulus on state and local purchases also was small–in their view, it simply reduced state and local borrowing. This latter claim is likely to be controversial.

However, if one accepts their point of view, one is left with a stimulus that consisted largely of temporary tax cuts and transfer payments, including the intergovernmental transfer that amounts to substituting Federal borrowing for state and local borrowing. Even Keynesian economists would predict relatively little stimulative effect from this.

One question I have is how to reconcile Taylor-Cogan with Blinder-Zandi, the CBO, and everybody else in the Keynesian camp who claims that the stimulus made a big difference in terms of employment and output. Some possibilities:

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.

Note: those who do not believe in Keynesian economics in the first place don’t have a dog in this particular fight.