The Chart That Proves the Stimulus Was Never Tried

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Why Paul Krugman has started blowing up cars.

Depending on how closely you follow politics, you have probably heard one or two or fourteen million times that the economic stimulus was tried and "didn't work." (Today's example, from Republican budget guru Paul Ryan: "It hasn't worked, and especially when you're taking these temporary tax rebates and paying for them with permanent tax increases, that is actually self-defeating," he said. "So, we just don't want to go with ideas that have already proven to fail.") You have probably also heard some frustrated liberals insisting that the stimulus did work but wasn't big enough. There wasn't really a good way to settle the question. Until now.

Paul Krugman, via Goldman Sachs, has a chart on the stimulus. It's the most important chart I've seen on this topic, which has spawned oh-so-many charts. I'll show it, and then explain it:

Okay, here is what this chart is telling us. The federal government has been pumping economic stimulus, in the form of higher spending and lower taxes, into the economy since 2009. But state and local governments have been pumping stimulus back out of the economy.

Why? Because state and local governments can't run deficits. They have to balance their budgets. When the economy slows down, those governments collect less taxes, and often they have to spend more (on, say, programs for the poor, because more people qualify in a terrible economy.) So states that had balanced budgets at a given level of taxes and spending before the crisis suddenly have to raise taxes and/or cut spending in order to balance their budget during the crisis. The private sector is throwing people out of work, and the public sector is throwing even more people — cops, teachers, and so on — out of work.

The Goldman Sachs chart here measures the effect of the federal government's stimulus against state and local governments' anti-stimulus. Guess what? Anti-stimulus has been winning since the middle of 2010. That is, the federal government has been pulling in the direction urged by Krugman, the Obama administration, and the entire macroeconomic forecasting field. State and local governments have been pulling in the direction urged by Paul Ryan, the rest of the Republican Party, and a handful of right-wing economists. And for the last year, the right-wingers have been prevailing.

This offers an appropriate context in which to understand Obama's jobs plan. As Goldman Sachs indicates, if Congress approves Obama's plan (prognosis: dead on arrival) it would mainly just create enough new stimulus from the federal government to slightly overcome the state and local anti-stimulus. The net effect of government fiscal policy on the economy would be neutral. It would be sort of like the Lend-Lease program to help Great Britain win the war, if we were already giving weapons to the Nazis. A big improvement, in other words, but not exactly an overwhelming response.

More importantly, it explains just whose economic prescription we've been following the last year or so. It's not Krugman's. It's not even Obama's. To be sure, it's not a purist version of the Republican plan, either — that plan being to have the federal government respond to a world in which state and local governments are slashing their budgets by slashing its own budget even more. But to the extent that we are following anybody's plan, we are following Ryan's plan more closely than Obama's.

We all know Ryan is a modest man (as he has modestly explained so many times.) Maybe, just this once, he should take credit for his handiwork.