Saturday, May 26, 2012

How big was the stimulus?

The figure shows the rates of growth of total federal government spending in three periods 1930-36, 1941-45 and during the last recession and after, that is 2008-11.
The longest series is 7 years, and you see that spending growth peaked in the third year, but is visible even in the last year. World War II saw a massive increase in government spending. By the standards of those previous stimuli the last one has been moderate in size, and even worse, not sustained in time. In the third year the rate of growth of government spending was negative. That is, after the 2009 stimulus government spending fell in comparison to the previous year.

And yes the comparison with the Great Depression and the War is okay, since the size of the shock was by almost any measure as big as the one  back then.


  1. But you can't just divide gov't spending by GDP, since GDP is changing as well -- thats the whole point. In your methodology, an effective stimulus would show up as smaller, since GDP would rise too. You should use initial-year GDP as the denominator for all years. That will make the WWII increase look even larger, but it will make the 1930s increase look smaller.

    Of course the essential point will remain unchanged.

    Also, why do you say the shocks were similar? Keep in mind, private investment fell by 80 percent in the early '30s. Hard to argue for anything comparable this time.

    1. Hey, JW. Not an exercise on how effective the stimulus was, since I'm not measuring the stimulus well there (not the autonomous part of gov spending). So your point is well taken. Just note how much more government spending is expanding as compared to GDP, that is the willingness to expand the size of gov in the middle of a crisis, and how prolonged that was back then. Also, investment reacts to the shock, since it follows the accelerator. It didn't collapse this time around, since effective monetary and fiscal policy, since the beginning of the crisis avoided a collapse of output comparable. Eichengreen et al (at have a paper on the comparison of the two shocks.


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