Several of my colleagues on the Harvard faculty have recently been casualties in the cross-fire between fiscal austerians and stimulators.   Economists Carmen Reinhart and Ken Rogoff have received an unbelievable amount of press attention, ever since they were discovered by three researchers at the University of Massachusetts to have made a spreadsheet error in the first of two papers that examined the statistical relationship between debt and growth.   They quickly conceded their mistake.

Then historian Niall Ferguson, also of Harvard, received much flack when — asked to comment on Keynes’ famous phrase  ”In the long run we are all dead” — he “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.”  

There is more to be said about each of the two cases.  (i) Reinhart and Rogoff’s 2010 estimates had already been superseded by a subsequent 2012 paper of theirs written along with Carmen’s husband, Vincent, which used a more extensive data set where the error does not appear.  (ii) The debt-growth causality is debated.  (iii) “Some of Ferguson’s best friends are gay.”   (iv) Keynes was actually bi-sexual.  (v) He tried to have children.  And so forth.  Most of this has already been said many times by now.  Apparently people are even more fascinated by Harvard than they are about macroeconomic theory.

But what does it all have to do with the debate between austerians and stimulators?   Not much.  But the battle lines of the austerians have been wavering lately under the continuing onslaught of facts (most notably the recessions in Europe and Japan’s recent conversion to stimulus), and the stimulators find the missteps of Reinhart-Rogoff and Ferguson to be convenient stones to throw into the attack as well.   But they are barking up the wrong tree.  Sorry;  they are throwing the wrong stones.

The Reinhart-Rogoff controversy is not in fact relevant to the question whether governments should expand or contract at a given point in time.  The basic finding in their papers continues to hold up, that subsequent growth tends to be lower among countries with debt/GDP ratios above 90% than below 90%; but neither that finding nor their policy advice was designed so as to support the proposition that a recession is a good time to undertake fiscal contraction. 

The Ferguson controversy is even less relevant, because the phrase “in the long run we are all dead” was neither about fiscal policy when Keynes wrote it nor an argument against deferred gratification.   Nor was Keynes in favor of uninhibited fiscal stimulus regardless of economic conditions;  he argued, rather, “the boom, not the slump, is the right time for austerity at the Treasury.”     Fix the hole in the roof when the sun is shining, not when it is raining.

Neither of the controversies bears on the policy proposition that is important at the moment, which is the Keynesian claim that under conditions of high unemployment, low inflation, and low interest rates (the conditions that hold in rich countries today, as in the 1930s), fiscal expansion is expansionary and fiscal contraction is contractionary.

Some research by yet another highly valued colleague at Harvard does bear much more directly on this important proposition.   Alberto Alesina has not been receiving his “fair share of abuse.”  His influential papers with Roberto Perotti  (1995, 1997) and Silvia Ardagna (1998, 2010) found that cutting government spending is not contractionary and that it may even be expansionary.  

It is true that sometimes a country may have no alternative to fiscal “consolidation,” if its creditors insist on it, as has been the case with Greece and some other euro members.  But that does not mean austerity is expansionary, especially if the currency cannot depreciate to stimulate exports.

As with Reinhart and Rogoff, the Alesina papers themselves are much more measured in their conclusions than one would think from the claims of some conservative politicians that academic research finds fiscal austerity to be expansionary in general.  Nevertheless, the conclusions are clear:  “Even major successful adjustments do not seem to have recessionary consequences, on average” (1997).  And “several fiscal adjustments have been associated with expansions even in the short run” (1998).   And “spending cuts are much more effective than tax increases in stabilizing the debt and avoiding economic downturns. In fact, we uncover several episodes in which spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions” (2010, p.3).   Most recently, a May 2013 paper with Carlo Favero and Francesco Giavazzi finds “that spending-based adjustments have been associated, on average, with mild and short-lived recessions, in many cases with no recession.”  

Alesina’s recent policy advice is that the US should cut spending “right away.”  By contrast, the advice of Reinhart and Rogoff seems to favor postponing fiscal adjustment (trim entitlements in the future, but increase infrastructure spending today) and considering financial repression.  In more far-gone cases like Greece, they lean toward restructuring the debt.   If the thunderstorm is too severe and the roof is too far-gone to be fixed, it may be necessary to rebuild from scratch.

A new attack on Professor Alesina’s econometric findings comes from an unlikely source:   Perotti, the co-author of the first two of the five articles, has now recanted (2013a, b).    He points out some problems with the methodology (including the papers that Alesina wrote with Ardagna).  Under the dating scheme, the same year can count as a consolidation year, a pre-consolidation year, and a post-consolidation year.   It turns out that some of what have been treated as large spending-based consolidations, though announced by the governments, were in fact never implemented.  Currency devaluation, reduced labor costs, and export stimulus played an important part in any instances of growth, for example, the touted stabilizations of Denmark and Ireland in the 1980s.  His conclusions:  “the notion of ‘expansionary fiscal austerity’ in the short run is probably an illusion: a trade-off does seem to exist between fiscal austerity and short-run growth” and so “the fiscal consolidations implemented by several European countries could well aggravate the recession” (2013b, p.10).   To me, this is a more powerful indictment of the reasoning behind recent attempts at fiscal discipline during recession than is a spreadsheet error or a too-flippant line about Keynes’ sexuality.

References
    Alberto Alesina, and Silvia Ardagna, 1998, “Tales of Fiscal Adjustment,” Economic Policy Vol.13, no, 27, October, 487-545.
     Alberto Alesina, and Silvia Ardagna, 2010,  ”Large Changes in Fiscal Policy: Taxes versus Spending,” in Tax Policy and the Economy, Volume 24 (University of Chicago Press).
     Alberto Alesina, Carlo Favero and Francesco Giavazzi, 2013, “The Output Effect of Fiscal Consolidations,” IGIER, May.
     Alberto Alesina and Roberto Perotti. 1995, “Fiscal Expansions and Adjustments in OECD Countries,” Economic Policy, October.  NBER WP 5214.
   Alberto Alesina and Roberto Perotti, 1997, “Fiscal Adjustments In OECD Countries: Composition and Macroeconomic Effects,”  International Monetary Fund Staff Papers, vol.44, no.2, June, 210-248.
     Francesco Giavazzi and Marco Pagano, 1990, “Can Severe Fiscal Contractions be Expansionary?” NBER Macroeconomics Annual 1990, Vol.5, Olivier Blanchard and Stanley Fischer, editors (MIT Press) p. 75 - 122.
    Thomas Herndon, Michael Ash, and Robert Pollin, 2013, “Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,” Political Economy Research Institute WP Series 322,University of Massachusetts Amherst, April.
     Roberto Perotti, 2013a,”The ‘Austerity Myth’: Gains Without Pain?” A. Alesina and F. Giavazzi, eds.: Fiscal Policy After the Financial Crisis (University of Chicago Press). BIS WP 362.  NBER WP no 17571.
     Roberto Perotti, 2013b, “The Sovereign Debt Crisis in Europe: Lessons from the Past, Questions for the Future,” Academic Consultants Meeting , Federal Reserve Board , Washington DC , May 6 , 2013.  Bocconi University.
     Carmen Reinhart and Ken Rogoff, 2010, “Growth in a Time of Debt,” AER, 100, May, 573-578.
     Carmen Reinhart, Vincent Reinhart, and Kenneth Rogoff, 2012, “Public Debt Overhangs: Advanced-Economy Episodes Since 1800,” Journal of Economic Perspectives, Vol.26, No.3-Summer, 69-86.

 [Comments can be posted at On Deck of Project Syndicate or on the site of the shortened op-ed version.]

          The year 2013 marks the 100^th anniversaries of two separate major institutional innovations in American economic policy:  the Constitutional Amendment enacting the federal income tax, ratified on February 3, 1913, and the law establishing the Federal Reserve, passed in December 1913.  
           It took some time before the two new institutions became associated with the explicit concepts of fiscal policy and monetary policy, respectively.   It wasn’t until after the experience of the 1930s that they came to be viewed as potential instruments for managing the macro-economy.  John Maynard Keynes, of course, pointed out the advantages of expansionary fiscal policy in circumstances like the Great Depression.   Milton Friedman blamed the Depression on the Fed for allowing the money supply to fall.    [Tools of fiscal policy used by governments, in addition to tax rates and tax deductions, are spending and transfers.  Tools of monetary policy used by central banks include interest rates, quantities of money and credit, and instruments such as reserve requirements and foreign exchange intervention used in various (non-US) countries.]

           In subsequent debate, Keynes was associated with support for activist or discretionary policy.  The aim was counter-cyclical response to economic fluctuations: expansion in recessions, discipline in booms.  (It is a myth that he favored big government generally.  He said “the boom is the time for austerity.”)    Friedman opposed activist or discretionary policy, believing that government institutions, whether monetary or fiscal, lacked the ability to get the timing right.   But both great economists were opposed to pro-cyclical policy moves, such as the misguided US tightening of 1937 at a time when the economy had not yet fully recovered. 
          After World War II, the lessons of the 1930s were incorporated into all the macroeconomic textbooks and, to some extent, into the beliefs and actions of policy-makers.  But many of these lessons have been forgotten in recent decades, crowded out of public consciousness by experiences such as the high-inflation 1970s.  As a result, many politicians in advanced countries are repeating the mistakes of 1937 today.  This despite conditions that are qualitatively similar to those that determined Keynes’ policy recommendations in the 1930s: high unemployment, low inflation, and rock-bottom interest rates.

         The austerity-versus-stimulus debate has been thoroughly hashed out.   On the one hand, proponents of austerity correctly point out that the long-term consequences of permanently expansionary macroeconomic policy [both fiscal and monetary] are unsustainable deficits, debts, and inflation.    On the other hand, proponents of stimulus correctly point out that in the aftermath of a recession, when unemployment is high and inflation low, the immediate consequences of contractionary macroeconomic policy are continued unemployment, slow growth, and debt/GDP ratios that go up rather than down.  Procyclicalists, both in the US and Europe, represent the worst of both worlds:  they push in the direction of expansion during booms such as 2003-07 and in the direction of contraction during recessions such as 2008-2012, thereby exacerbating both the upswings and downswings.  Countercyclicalists have it right:  working in the direction of fiscal and monetary discipline during booms and ease during recessions.

           Less thoroughly aired recently is the question whether — given recent conditions - monetary or fiscal expansion is the more effective instrument.   This question was addressed clearly in 1937 by Sir John Hicks in a once-famous article titled “Mr. Keynes and the Classics.”  The graphical model is known to many generations of undergraduate students in macroeconomics under the label “IS-LM.”   
           The answer to the question which form of policy is more effective:  under the circumstances that held in the 1930s and that hold again now - which are conditions not just of high unemployment and low inflation, but also near-zero interest rates — stimulus in the specific form of fiscal expansion is much more likely to be effective in the short-term than stimulus in the form of monetary expansion.   Monetary expansion is rendered relatively less effective because interest rates can’t be pushed below zero.  (Flat LM curve.)  This situation, labeled by Keynes a liquidity trap, is today called the Zero Lower Bound.  In addition, firms are less likely to react to easy money by investing in new plant and equipment if they can’t sell the goods they are producing in the factories they already have.  (Steep IS curve.)  The hoary — but still evocative — metaphor is “pushing on a string.”  Meanwhile, fiscal expansion is rendered relatively more effective than in normal times, in that it doesn’t push up those rock-bottom interest rates and thereby crowd out private-sector demand.
           Despite the inability of central banks to push short-term nominal interest rates much lower, one should not give up completely on monetary policy, especially because fiscal policy is so thoroughly hamstrung by politics in most countries.  It is worth trying all sorts of things:  quantitative easing, forward guidance, nominal targets.   Even if the short-term interest rate channel is inoperative, such steps may work through other channels:  long-term interest rates, credit channel, risk premia, expected inflation, asset prices, commodity prices or exchange rates.  But the effects of each are highly uncertain. 

          That monetary policy is less effective than fiscal policy under conditions of high unemployment and zero interest rates should not be a novel position.  But many economists have forgotten much of what they knew and politicians may not have even heard the proposition. 
          Introductory economics textbooks have long talked about the Keynesian multiplier effect:  the recipients of federal spending (or of consumer spending stimulated by tax cuts or transfers) respond to the increase in their incomes by spending more as well, as do the recipients of that spending, and so on.  Again, the multiplier is much more relevant under current conditions than in the normal situation where the expansion goes partly into inflation and interest rates and thus crowds out private spending.  By the time of the 2008-09 global recession even those who believed that fiscal stimulus works had marked down their estimates of the fiscal multiplier — intimidated, perhaps, by theories of policy ineffectiveness.   (These are some of the same theories that predicted that a tripling of the monetary base over five years, or a near-doubling of M1, should double or triple the price level !)
          The subsequent continuing severity of recessions in the United Kingdom and other countries pursuing contractionary fiscal policies, apparently to the surprise of the politicians enacting them, suggested that fiscal multipliers are not just positive, but greater than one, as the old wisdom had it.   The IMF Research Department has now reacted to this recent evidence and bravely confessed that official forecasts, including even its own, had been operating with under-estimates of multiplier magnitudes.
          A new wave of econometric research estimates fiscal multipliers using methods that allow them to be higher in some circumstances than others.   Baum, Poplawski-Riberio and Weber (2012) allow the estimate to change when crossing a threshold measure of the output gap.  Batini, Callegari and Melina (2012) allow regime-switching, across recessions versus booms.  Others that similarly distinguish between multipliers in periods of excess capacity versus normal times include Auerbach and Gorodnichenko (2012a, 2012b), Bachman and Sims (2012), Baum and Koester (2011), and Fazzari, Morley and Panovska (2012).  Most of this research finds high multipliers under conditions of excess capacity and low interest rates.  Gordon and Krenn (2011) and Shoag (2012) have the same implication.    Related studies confirm other conditions that matter for the size of the fiscal multiplier in precisely the way the traditional textbooks say, for example that they are lower in small open economies because of crowding out of net exports.  (Perhaps due to fear of sounding old-fashioned, few of these studies have the courage to mention that these are the findings that one would have expected from the elementary textbooks of 50 years ago.) 

          Needless to say, the effects of fiscal policy are subject to substantial uncertainty.   One never knows, for example, when rising debt levels might suddenly alarm global investors who then start demanding abruptly higher interest rates, as happened to countries on the European periphery in 2010.    (For this reason, the United States would be well-advised to lock in a long-term path toward debt sustainability, even while undertaking a little short-term stimulus.)   In the case of stimulus in the form of tax cuts, one never knows how much of the boost to disposable income will be saved by households rather than spent. We are also uncertain as to the magnitude of negative effects of high tax rates, via incentives, on long-term growth.   And it is true that monetary policy is much better understood than it was in the past. 
            Nevertheless, if the question is whether it is monetary policy or fiscal policy that can more reliably deliver demand expansion under current conditions, the answer is the latter.  One might even dramatize the contrast by speaking of “monetary alchemy and fiscal science.”

            A much-admired 2010 paper by Eric Leeper had it the other way around: it characterized monetary policy as science and fiscal policy as alchemy.   It is true that the state of knowledge and practice at central banks, which actually set the instruments of monetary policy, is close to the best that modern society has to offer.    It is likewise true that the instruments of fiscal policy are set in a very political process that is poorly informed by the state of economic knowledge and motivated largely by politicians’ desire to be re-elected.  These political realities may be what the author of “Monetary Science, Fiscal Alchemy” had in mind.
             But the ancient alchemists were not in fact stupid or selfish people in general, notwithstanding their search for the “philosopher’s stone” that was to turn lead into gold (of which modern proponents of returning monetary policy to the pre-1914 gold standard are reminiscent).  Nor was the alchemists’ problem that the monarchs of their day refused to listen to them.  It was rather that the state of knowledge fell far short of what the modern science of chemistry can tell us.   
            The term alchemy could be applied to pre-Keynesians like US Treasury Secretary Andrew Mellon (whose Depression prescription was that President Herbert Hoover should “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system”).  It could also be applied to the “Treasury view” in the UK of 1929. (Churchill:  ”The orthodox Treasury view … is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.” ).  But in light of all that was learned in the 1930s, it would be misleading to characterize the current state of fiscal policy knowledge as alchemy.

References

   Miguel Almunia, Agustín Bénétrix, Barry Eichengreen, Kevin O’Rourke, and Gisela Rua, 2010, “From Great Depression to Great Credit Crisis: Similarities, Differences and Lessons,” Economic Policy, 25 (62), pp. 219-65.
   Alan Auerbach and Yuriy Gorodnichenko, 2012a, “Measuring the Output Responses to Fiscal Policy,” American Economic Journal: Economic Policy, vol. 4(2), pp. 1-27, May.
   Alan Auerbach and Yuriy Gorodnichenko, 2012b, “Fiscal Multipliers in Recession and Expansion,” NBER Chapters, in Fiscal Policy after the Financial Crisis, edited by Alberto Alesina and Francesco Giavazzi (University of Chicago Press).
   Rüdiger Bachmann and Eric Sims, 2012, Confidence and the transmission of government spending shocks,” Journal of Monetary Economics vol. 59, no.3, pp.235-249.  NBER WP No. 17063, May.
   Nicoletta Batini, Giovanni Callegari and Giovanni Melina, 2012. “Successful Austerity in the United States, Europe and Japan,” IMF Working Papers 12/190, International Monetary Fund.
   Anja Baum and Gerritt Koester, 2011, “The Impact of Fiscal Policy on Economic Activity Over the Business Cycle - Evidence from a Threshold VAR Analysis” Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies  no. 2011,03.
   Anja Baum, Marcos Poplawski-Riberio and Anke Weber, 2012, “Fiscal Multipliers and the State of the Economy,” IMF Working Paper 12/286, International Monetary Fund, December.
   Olivier Blanchard and Daniel Leigh, 2013, “Growth Forecast Errors and Fiscal Multipliers,” IMF Working Paper No. 13/1, January.  Forthcoming, American Economic Review, May.  
   Steven Fazzari, James Morley, and Irina Panovksa, 2012, “State-Dependent Effects of Fiscal Policy,”  UNSW Australian School of Business Research Paper No. 2012-27, April.      
   Milton Friedman and Anna Schwartz, 1963,  A Monetary History of the United States, 1867-1960 (Princeton University Press).
   Robert Gordon and Robert Krenn, 2011, “The End of the Great Depression 1939-41: Policy Contributions and Fiscal Multipliers,” NBER Working Paper No. 16380.
   John Hicks, 1937, Mr. Keynes and the Classics: A Suggested Reinterpretation,” Econometrica, pp. 147-59.
   Ethan Ilzetzki, Enrique Mendoza & Carlos Vegh, 2011. “How Big (Small?) are Fiscal Multipliers?,” IMF Working Papers 11/52 (International Monetary Fund.)  Forthcoming, Journal of Monetary Economics.
   Eric Leeper, 2010, “Monetary Science, Fiscal Alchemy,” NBER Working Paper No. 16510.
   Christina Romer and David Romer, 2013, “The Most Dangerous Idea in Federal Reserve History: Monetary Policy Doesn’t Matter,” UC Berkeley, January.
   Daniel Shoag, 2012, “The Impact of Government Spending Shocks: Evidence on the Multiplier from State Pension Plan Returns,” Harvard Kennedy School.
   Antonio Spilimbergo, Steven Symansky, and Martin Schindler, “Fiscal Multipliers,” Staff Position Note No. 2009/11, International Monetary Fund.

[This post appears at VoxEU.  And also at  Econbrowser. Comments may be posted there.]

With November’s election fast approaching, the Republican candidates seeking to challenge President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, his fiscal stimulus made matters worse.  And, despite recent improvement, the level of unemployment indeed remains far too high.not blame George W. Bush for the recession that began two months after he took office in 2001. There hadn’t yet been time for bad policies to damage the economy.)

Obama’s Democratic defenders counter that his policies staved off a second Great Depression, and that the US economy has been steadily working its way out of a deep hole ever since.  Middle-ground observers, meanwhile, typically conclude that one cannot settle the debate, because one cannot know what would have happened otherwise.

There is a good case to be made that government policies - while not strong enough to return the economy rapidly to health — did indeed halt an accelerating economic decline.    By “government policies,” I mean not just the fiscal stimulus the new president steered through Congress when he took office, but also the Obama version of TARP, and Fed Chairman Ben Bernanke’s aggressive monetary stimulus.   All three policy initiatives remain extremely unpopular with Republicans, and ambiguous among swing voters.

But the middle-ground observers are of course right that one cannot prove what would have happened otherwise.   It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.  These things usually take time.  One cannot infer the merit of a new president’s policies from the path of the economy during his first few months in office.  (For example, I did

But here is the remarkable thing: whether one listens to the Republicans, the Democrats, or the middle-ground observers, one gets the impression that the economic statistics show no discernible improvement around the time that Obama took office. In fact, the reality could hardly be more different.

This is especially true if one looks at revised economic statistics, which show the US economy to have been in far worse shape in January 2009 than was reported at the time. In January 2009, the annualized growth rate in the second half of 2008 was officially estimated to have been negative 2.2%; but current figures reveal it to have been a horrendous negative 6.3%. This is the main reason why the level of economic activity in 2009 and 2010 was so much lower than had been forecast, which in turn explains why unemployment was so much higher.

Figure 1 shows the quarterly economic growth rate. The maximum rate of contraction — a veritable freefall in the economy — came in the last quarter of 2008 (the quarterly GDP data come from the Bureau of Economic Analysis of the U.S. Commerce Department).   More specifically, it came in December, according to the monthly GDP estimates from the highly respected MacroAdvisers.   (See monthly income figures in the form of growth rates in Figure 2 or levels of GDP in Figure 3.)  This was the month before Obama was inaugurated.  The situation miraculously began to improve as soon as Obama’s term began! 

(click here for larger graphs)

The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009.    The NBER officially designates the end of the recession as having come in June of that year.  GDP growth turned positive in the third quarter.

US economic growth slowed down again in late 2010 and early 2011, as one can see in Figure 1.  The timing coincides with the beginning of withdrawal of the Obama fiscal stimulus. Indeed, the government has been the one sector to experience contraction in income and employment over the most recent five quarters.  The private economy has been expanding.

Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. Labor-market recovery normally lags behind that of GDP - hence the “jobless recoveries” of recent decades. But the graph of monthly job losses and gains reveals that here, too, the end of the freefall came precisely when Obama was inaugurated.  The last two charts show the same “V” shaped pattern in the monthly job change figures that are released by the Bureau of Labor Statistics, as the GDP growth figures that are released by the BEA.  The rate of job growth over the last two years, inadequate as it is, actually exceeds the rate of job growth during the Bush Administration, even if one counts only the period before the big recession hit in December 2007.

Again, these graphs do not demonstrate that Obama’s policies yielded an immediate payoff. In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.

What is the right way to assess whether the fiscal stimulus enacted in January 2009 had a positive impact?   Start with common sense. When the government spends $800 billion on such things as highway construction, teachers and policemen who were about to be laid off, and so on, it has an effect. Workers who would otherwise not have a job now have one. Furthermore, they may spend some of their income on goods and services produced by other people, creating a multiplier effect.

Those who claim that this spending does not boost income and employment (or that it even hurts), apparently believe that as soon as a teacher is laid off, a new job is created somewhere else in the economy, or even that the same teacher finds a new job right away. Neither can be true, not with unemployment so high and the average spell of unemployment much longer than usual.

They also think that the government deficit drives up inflation and interest rates, thereby crowding out other spending by consumers and firms. But interest rates are rock bottom, even lower than they were in January 2009, while core inflation is running at its lowest levels since the early 1960’s. The conditions of the last four years - high unemployment, depressed output, low inflation, and low interest rates - are precisely those for which traditional “Keynesian” remedies were designed.

Economists’ more sophisticated forecasting models also show that the fiscal stimulus had an important positive effect, for much the same reasons as the common-sense approach.   The non-partisan US Congressional Budget Office reports that the 2009 spending increase and tax cuts gave a positive boost to the economy, and indeed had the extra multiplier effects of the traditional Keynesian models. Allowing for a wide range of uncertainty [to allow for different economists' views], the CBO estimates that the stimulus added 1.5 percent to 3.5 percent to the level of GDP by the fourth quarter, relative to where it otherwise would have been.  The boost to 2010 GDP, when the peak effect of the stimulus kicked in, was roughly twice as great.

To be sure, of the many theoretical models produced by eminent macroeconomists at prestigious universities, some say that fiscal stimulus has no positive effect on the economy, even under recent economic conditions.  (The theoretical innovations underlyng the models have even won Nobel Prizes for the innovators, and not without justice.)  But these models are not sufficiently realistic to meet the market test:  they are not used by private businessmen for whom getting good forecasts matters to their planning and in turn to the success of their businesses.

Of course, econometric models do not much interest the public at large. A turnaround needs to be visible to the naked eye to impress voters. Given this, one can only wonder why basic charts, such as the 2008-2009 “V” shape in growth, have not been used - and reused - to make the case.

(Click here for larger versions of all 5 graphs.)

[Appears also at Fair Observer,with a nice presentation of the charts.

A shorter version appeared as an op-ed at Project Syndicate, which has the copyright.]