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Review & Outlook: Why the STIMULUS Failed – WSJ.com

September 8, 2011

Why the Stimulus Failed

New research on what actually happened to a trillion dollars.

REVIEW & OUTLOOK SEPTEMBER 8, 2011

Even zero jobs growth in August doesn’t seem to have disrupted President Obama’s faith in the economic policies of his first three years, so one theme we’ll be listening for in tonight’s speech is how he explains the current moment. Why did his first jobs plan—the $825 billion stimulus—so quickly result in the need for another jobs plan?

For readers who want to know, an important account is offered in a pair of new Mercatus Center working papers by the George Mason economists Garett Jones and Daniel Rothschild, who did field research on what they call the supply side of the stimulus.

The Keynesian theory was that a burst of new government spending would take up some of the slack in aggregate consumer demand. This was justified in 2008, again in 2009, and is still defended now based not on real-world observation but on abstract macroeconomic models that depend on the assumptions of the authors. The Congressional Budget Office’s quarterly studies—often cited to claim the stimulus created tens of thousands of new jobs—are based on such a model. By informative contrast, Messrs. Jones and Rothschild interviewed actual people who received stimulus dollars and asked how they spent the money.

In the first paper, the authors survey 85 different businesses, nonprofits and local governments across the country and conclude that “As is often the case when economic models are transferred from the blackboard to actual public policy, there was a gap between theory and practice.”

via Review & Outlook:Why the Stimulus Failed – WSJ.com.

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