New Study Shows How The Stimulus Money Was Wildly Misspent And Could Have Been Way More Effective

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REUTERS/ Larry Downing

Barack Obama smile moments after he signed the American Recovery and Reinvestment Act Bill next to U.S. Vice President Joseph Biden at the Denver Museum of Nature and Science February 17, 2009.

Since the beginning of the Great Recession, the longstanding canard from the political and economic left has been that the "stimulus" — the Obama administration's attempt to mitigate 2009's economic trauma — was too small.

A new working paper from the National Bureau of Economic Research takes a look at t he administration's $796 billion fiscal stimulus (known as ARRA), and more specifically at the $318 billion dedicated to state and local governments.

Economists Gerald Carlino and Robert Inman reach an interesting conclusion (via Dylan Matthews):

Simulations using the SVAR specification suggest ARRA assistance would have been 30 percent more effective in stimulating GDP growth had the share spent on government purchases and project aid been fully allocated to private sector tax relief and to matching aid to states for lower-income support.

" Aggregate federal transfers to state and local governments are less stimulative than are transfers to households and firms. It is important to evaluate the two policies separately," They write. Also: "Within intergovernmental transfers, matching (price) transfers for welfare spending are more effective for stimulating GDP growth than are unconstrained (income) transfers for project spending."

The research suggests that the refrain that the stimulus was "too small" is misguided, or perhaps incomplete. If anything, the stimulus was poorly allocated.



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