The crisis led to significant fiscal stimulus efforts by the US government to offset the downturn. But this column argues that, properly adjusted for the declining fiscal expenditure of the fifty states, the aggregate stimulus was close to zero in 2009. While a net decline was avoided, the stimulus did not raise aggregate expenditure above its predicted mean. This can explain the anaemic reaction of the US economy to the alleged “big federal fiscal stimulus”.
Bailout packages have dominated political debate in the US and elsewhere. The global financial crisis led to a massive bailout of the US financial system and significant fiscal stimulus efforts by the US federal government to offset the resulting severe economic downturn. The sheer size of the federal commitments, at a time when the unemployment reached two digit figures, has led observers to question the efficacy of fiscal policy. Moreover, questions were raised with respect to the size of the fiscal multiplier in the US, as well as about possible adverse effects of higher future debt overhang (see de Resende et al. 2010, Barro and Redlick 2009, Spilimbergo et al. 2009 and the references therein).
Given that the counterfactual of the performance of the US economy in the absence of the fiscal stimulus is hard to ascertain, one may thus question its effectiveness, and hence the logic of continuing it. Before taking a position on these vexing issues, it is vital to ascertain the net size of the fiscal expenditure stimulus of the real sector. This issue is of key importance in a federal system like the US, where the fifty states are restrained from borrowing in recessions and frequently refrain from raising taxes at times of collapsing tax bases. While stabilising the financial system is useful in preventing bank runs, deepening credit constraints facing key sectors like local government expenditures imply that financial bailouts would not prevent, in the short-run, a sizable contraction of aggregate demand.