An Empirical Analysis of the Revival of Fiscal Activism in the 2000s

Macroeconomic data indicate that the three American discretionary countercyclical stimulus packages of the 2000s had little if any direct impact on consumption or government purchases, and thus did not stimulate the economy as Keynesian models would predict. Households largely saved the transfers and tax rebates. The federal government only increased purchases by a very small amount. State and local governments saved their stimulus grants and shifted expenditures from purchases toward transfers. Counterfactual simulations of the 2009-10 period show that a stimulus-induced decline in state and local government purchases was larger than the increase at the federal level. Counterfactual simulations also show that a larger stimulus package—with the proportions going grants, federal purchases, and net transfers to households as in 2009-10— would not have increased government purchases or consumption by a larger amount. These results from the 2000’s experience raise doubts about the efficacy of such packages adding weight to similar assessments reached more than 30 years ago.