Guest Post: Aggressive Fiscal Stimulus Spending Only Shortens Recessions by Two Quarters

By George Washington of Washington’s Blog.

Keynesians argue that we must increase fiscal stimulus to prevent a full-scale depression.

They argue that “deficit hawks” are wrong when they say that we can’t afford any more stimulus, and that worrying about debt in a crisis of this size is penny wise and pound foolish, given the bleak unemployment figures and other fundamentals. They also point out that America’s debt as a percentage of GDP is far less than Japan’s.

On the other hand, those worried about the giant debt overhang argue that massive debt and the failure to write down worthless assets and “purge malinvestments” from the system are the main problems.

Many also argue that the 1930s Keynesian stimulus programs did not work, and that the Depression did not end until World War II. And they also argue that every dollar in additional debt incurred now is another burden added to our childrens’ shoulders.

Who is right?

Before deciding, you might want to look at two pieces of data.

Different Bangs for the Buck

Initially, many Keynesian academics argue that it doesn’t matter where the stimulus money is spent, just as long as it is spent on something. However, this is untrue. For example, it should be obvious that spending in some areas will have more and quicker turnover (increasing money velocity) as compared to others. And, in fact, economists have documented that some types of stimulus spending have more bang for the buck than others.

So it is idiotic to talk about “fiscal spending” in the abstract. Without a cost-benefit analysis as to each category of proposed spending, any analysis is hollow.

Aggressive Fiscal Stimulus Only Buys Two Quarters

Moreover, as former chief IMF economist and MIT professor Simon Johnson points out:

Perhaps the best analysis regarding the impact of fiscal policy on recessions was done by the IMF. In their retrospective study of financial crises across countries, they found that nations with “aggressive fiscal stimulus” policies tended to get out of recessions 2 quarters earlier than those without aggressive policies. This is a striking conclusion – should we (or anyone) really increase our deficit further and build up more debt (domestic and foreign) in order to avoid 2 extra quarters of contraction?

Indeed, many experts say that continuing to cover-up the fraud which led to the financial crisis will extend the crisis for many years. In other words, failure to investigate and prosecute those responsible for bringing about the crisis may extend the crisis longer than any failure to spend more on stimulus.

(And investigations and prosecutions for fraud – unlike stimulus spending – would not increase America’s debt or tax burden.)

A real debate about whether we should spend more on stimulus – and if so, what types of stimulus – cannot even begin unless and until the aforementioned data is considered.

Note: Others have calculated bang for the buck from stimulus packages. For example, here are the Congressional Budget Office‘s estimates (look for “Estimated Policy Multiplier”):



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  1. MyLessThanPrimeBeef

    Why is it that we only know we’re in a recession a few quarters into it and we always know (supposedly) we will be out a couple of quarters before it happens?

    I would think it would be more helpful to know we will be in a recession before it happens and be prudent to think about it’s over when it’s actually over.

  2. mannfm11

    That is a story they wish you would believe. I don’t believe they shorten recessions at all and if they do, they merely bring the start of the next one that much closer. Government spending has created the backbone of every bubble in modern history. The Fed and WW I clearly set the stage for the roaring 20’s and the Great Depression. Fed stimulus set the stage for China and, if the prior depression is any model, a great depression there as well. You have to remember the US already had a trade spillover in credit and most of the reversal of the spillover will come out of imports. The great secret they don’t want any of us to know is if they can’t get us to go into debt, their plans don’t work.

    1. mannfm11

      And, the fraud runs deep. Maybe there arent enough jails to hold all the fraud artist out there. They pulled the rug out from under Stanford, yet there isn’t a bank in the world that could stand a SEC induced run. And, if there was a run, their assets would liquidate at about 30 cents on the dollar.

  3. winterwarlock

    (you know who you are; the ones that took the easy way out, expecting the institutions to fulfill their promise of security, from cradle to grave.)

    The People are talking, either waiting for the institutions to solve the problem, which they have never done in History, or waiting for the institutions to crash, which will only result in their own misery.

    The economy needs a new motor, but what sense does it make to distribute an independent fuel cell to power homes and vehicles if The People cannot maintain it, and will quickly become enslaved by the same system that has its foot on their neck now?

    Government is the sum product of responsibility not taken by individuals. Take your share of responsibility, and no more, and you will be free of it.

    Corporation distributes new processes and recycles the old ones. Sell your non-performing assets to someone who can employ or recycle them, at the required discount, and you will be free of it.

    Education is the economic hub, and your future depends entirely on your children. Currently, you are selling your kids to the institutions in return for short-term benefit, which gives the institutions power to destroy dissent. What exactly did you expect to happen?

    You came into this world as an alien, and society immediately began to exert control over you. So you have a kid to exert control yourself, instead of earning your freedom through education? That is the recipe for slavery.

    When you spoil a kid as a means of control, it is not long before the kid controls you. That is what you have taught your kids, and they have responded in kind. They don’t have to do anything, which is what you taught them, to liquidate you.

    Real estate prices will continue to fall, tax receipts will continue to fall, and demand for corporate and government services will continue to escalate until the system explodes. You liquidated your long-term assets for short-term security, and now you have neither.

    You have basically taken out a short on your own positions, in majority numbers, and the efficient market is simply executing your order, and you want to blame the institutions instead of yourself. That approach can only result in complete liquidation.

    If you have kids, start taking responsibility for their proper education. If you do not, take one under your wing.

    Educate yourself as an example to your children and your economy will quickly right itself. The universe has extremely high expectations for humanity, but it will not hesitate to start over, and time is quickly growing short.

    You can continue to walk downhill, moaning and groaning about the Rockefellers, until you are dead, or you can turn back uphill and climb the mountain to your freedom. You sold yourself and your children short of your own free will. That’s natural selection.

    While you were busy collecting trinkets and a number in a computer, I was busy collecting the most talented kids, who naturally dropped out of the system, and training them to re-wire their minds. Their minds are now an order of magnitude more powerful than yours.

    They are going to the future, and you cannot stop them. You can go along for the ride, in the passenger seat, or you can be left behind. That is your remaining choice; you sold the rest of them off.

  4. DoctoRx

    Investigating any and all fraud should be done based on ethical and legal principles. Whether doing so is good or bad for the “economy” is irrelevant to whether such investigations should be done.

    If govt really could act as a flywheel per Keynes and moderate booms and mitigate busts, that would be marvelous.

    Since the Federal Govt in the US tries to EXTEND booms and moderate busts, govt is like the doctor who gives medicine to someone whether the “patient” is sick or well. Once in a while the patient actually needs it, but over all the doctor has not been useful and may have done harm.

  5. NC Jim

    “Many also argue that the 1930s Keynesian stimulus programs did not work, and that the Depression did not end until World War II.”

    What was WWII if not a huge government stimulus program?

    Mannfm11: Good to see you again (since the Prubear message board – I posted as Mountainbiker). I still use your comment that inflation is the only mathematical solution except I add “politically acceptable”.


    1. George Washington

      “What was WWII if not a huge government stimulus program?”

      Well, it certainly was a huge stimulus program, although I passionately am against another war as a stimulus measure.

      In addition, some argue that it was not the stimulus in WWII that got us out of the Depression, but the change of consumer focus.

      In other words, some market psychologists argue that it changed the frame of what people were thinking about, and got them to stop thinking about the Depression and start thinking about something else, and got them fired up to fight the Nazis and other fascists.

      1. NC Jim

        “Well, it certainly was a huge stimulus program, although I passionately am against another war as a stimulus measure.”

        Except that we are already have a two going on three trillion$ dual conflict. Imagine the economy w/o this stimulus.

        I was born in 1942 but remember my parents saying that there was nothing for sale during the war – even food required a ration card. People put cars on blocks for lack of tires. There must have been some major personal balance sheet repair during that period causing pent up demand. My Father basically paid off a mortgage in five years from extra war earnings (railroad worker who was barely home for the duration).


        1. winterwarlock

          newsflash: NBC News reported this evening that over 50% of kids in America will be wards of the State (foodstamps) next year.

        2. winterwarlock

          took a look at the author’s summary:

          “49 percent of all U.S. children will be in a household that uses food stamps at some point during their childhood,” says Mark R. Rank, Ph.D., poverty expert at the George Warren Brown School of Social Work at Washington University in St. Louis. “Food stamp use is a clear sign of poverty and food insecurity, two of the most detrimental economic conditions affecting a child’s health.”

          90 percent of black children will be in a household that uses food stamps. This compares to 37 percent of white children.

          Nearly one-quarter of all American children will be in households that use food stamps for five or more years during childhood.

          91 percent of children with single parents will be in a household receiving food stamps, compared to 37 percent of children in married households.

          Looking at race, marital status and education simultaneously, children who are black and whose head of household is not married with less than 12 years of education have a cumulative percentage of residing in a food stamp household of 97 percent by age 10.

          1. winterwarlock

            good story on Frontline:

            The Medicated Child

            attention deficit is now bipolar.

            4000% increase in bipolar diagnosis, children getting 4 medications, medication never tested.

            LSD all over again.

          2. winterwarlock

            The financial results are the results of decisions made forty years ago to disable new family formation, and perpetuate a demographic ponzi scheme with children bred for the purpose by institutions, and organizational dominance from birth.

            It’s not bad enough that we have destroyed childhood; now we have to medicate the result with untested anti-psychotics.

            Exactly how far does this have to go before people get upset enough to at least quit feeding the system?

  6. Dave of Maryland

    Normally Yves has better guest posts than these two. One saying Happy Days Are Here Again, the other, that stimulus spending has such slight effect, we might well not bother. I wouldn’t mind hearing both sides of the argument, but I see no evidence for such happy talk.

    From my vantage point, the economy sank significantly the third week in August. It has been sinking further, albeit more slowly, ever since. My personal accounting says October was a slight improvement, but this is contradicted by all the other evidence I see.

    It looks like a lot of people are hanging on by their fingernails, hoping for a big Christmas, but it’s already clear that Christmas will be terrifyingly small & as a result, a lot of business will go under in January & February. When they do they will drag their suppliers down with them. Everybody, and I mean everybody, is at 60 – 90 days with payables. Far too many – including me – are almost that far behind with payrolls. We’re all bust, we’re all walking dead. We just don’t want to admit it. We’re all praying for a miracle.

    We need to get Washington out of its ivory tower & out talking to main street. Or we can pray for a stock market crash. Any kind of crash. The bigger, the better. And soon. It’s the only thing, THE ONLY THING, that people pay any attention to.

  7. Eric

    What’s this talk of “continuing to cover-up”? This is ridiculous talk. There is no true cover-up going on here. It is in plain sight for the most part. AIG is given tax dollars to forward to other institutions to make good their terrible CDS decisions. The accounting standards people are browbeat in public to make sure the asset valuation methods retain a mark to fantasy option. GMAC will be granted a third steaming pile of money. The public got to get in line for up to $29B of Bear Sterns losses and then when $2/share was not enough for their equity holders the Fed and Treasury made it $10/share. PPIP is created to provide massive downside cushion for privileged private investors while they get almost every dime of the upside…here I recall it was considered a victory for the public that the holders of the dud assets weren’t allowed to game the system directly. If I had more time I would write down 50 more sharp practices that are public knowledge. Sure, I expect more outrages to become known as time goes on, but we know what the game is and we aren’t stopping it.

  8. Nathan

    I’m a little confused how Keynesian fiscal policy managed to be intertwined with “endless bailouts” per the author’s construction.

    Keynesian economists were amongst the staunchest advocates for seizure and re-privatization of the largest players in the financial markets, precisely because it was understood that we weren’t going to get any mark on healthy fundamentals when our financial system was full of more fiction than Disney.


  9. Goldilocksisableachblond

    Government counter-cyclical spending worked fine, and was sustainable, as long as the total of public plus private debt( ex-financial sector ) held constant as a % of GDP. This was the case from the end of the Depression till about 1980 , when the total ran in the range of 150-160 % of GDP. Since 1980 , it has more than doubled , to about 350% of GDP.

    Since 1980 , a surge in private sector debt has formed the bulk of that increase , as the lower 90% of earners and small businesses were squeezed while 15% of total additional GDP was redistributed to the top 1%.

    There’s our problem in a nutshell , and , if you’ll take off the blinders , the solution as well.

  10. gordon

    Geo. Washington is concerned about “bang for the buck”. I was a bit surprised that he linked to such an old set of multiplier estimates (Dec. 2008). He might like to look at this post at Economist’s View (Aug. 2009), in which Prof. Thoma has a go at answering the question.

    It’s not conclusive, but at least it’s more recent.

    There has also been (Jan. 2009) the Romer & Bernstein estimates of multipliers, accessible from here:

    And there was the CBO estimate (Mar. 2009) accessible from here:

    I think there have been others. I know that estimating “bang for the buck” is hard, but there have been a lot of attempts since Dec. 2008, and whatever you think of them it’s probably a good idea to at least acknowledge their existance.

    PS. I nearly forgot the recent (Sep. 2009) attempt by the Council of Economic Advisors:

  11. Hugh

    There are so many strawmen and other errors in this post it is difficult where to begin. Not all recessions are the same, and this one very definitely with its deflationary aspects is not typical.

    Fraud is important to attack but let’s face it we know where most of it is and, at least, in general terms who did it and how.

    The same thing could be said about a Keynesian approach. You want to increase demand. It is not a secret what kind of spending and programs are likely to produce quick demand. Initially, it doesn’t matter so much where the money is spent as long as that demand is created. Cash or Clunkers is a great example. Stupid program but for a short term burst in demand perfectly legitimate. The key is have follow up longer term programs that actually take us and the economy somewhere we want to go. This is what is missing. The original “flash” stimulus was too small to have any real effect on the fundamentals. Resources were wasted on the financials and time was lost in not fixing them and the problems they caused. And there has been zero serious thought given to building the economy in a more sustainable way.

    It is just a false argument to say we need to weight until all the fraud has been dealt with or all the stimuli have been assessed before doing anything. What in the world are you thinking?

    1. George Washington


      I never said (and don’t believe) that “we need to weight until all the fraud has been dealt”.

      But I respectfully disagree with your argument that it doesn’t matter where stimulus goes.

        1. ScottB

          George, agreed, but I agree with Hugh that you opened with a false dichotomy. Many of us wanted:

          No bailout, and what Calculated Risk took to calling “pre-privatization” of the insolvent big banks, in which they were closed, chopped up, and sold/reopened under new management, with shareholders toasted and bondholder taking a haircut trade for equity;

          Efficient stimulation of demand, through increased unemployment compensation, filling in the huge holes in state budgets, and investment in infrastructure and alternative energy. The tit-for-tat could have been forcing states to enact rainy-day fund legislation before they could receive a bailout;

          Single-payer health care reform to help lessen the impact of the looming budget crisis.

          Closing down the war in Afghanistan wouldn’t be a bad idea either.

    2. gordon

      Thank you Hugh. I actually think Geo. Washington is raising an important issue which you clarified when you said: “The key is have follow up longer term programs that actually take us and the economy somewhere we want to go. This is what is missing”. It’s the difference between a stimulus and a restructuring. Restructuring proposals have in fact been numerous, but disorganised and often focussed on banking/ finance alone. We need more, and ones which include Main St. as well as Wall St.

  12. George Washington Post author

    Thank you for the constructive criticisms. My goal is only to write accurate pieces, and I appreciate when my errors are corrected.

    I have revised the essay to be more accurate.

  13. Dave Raithel

    Minsky was hardly opposed to “government intervention in the markets.” A brief paper by Wray summarizing Minsky on government as “employer of last resort” can be pulled down here:

    Some choice passages:
    “Minsky returned to Keynes’s proposal for socialized investment, interpreting this as a call for a “mixed economy” with government investment playing a larger role (Minsky 1985). He also favored shifting production toward consumption and other policy that would improve the equality of distribution of income (Minsky no date). Finally, he argued that while policy can improve economic performance, the business cycle cannot be eliminated. Indeed, he insisted that uncertainty makes stability destabilizing—all realized outcomes are temporary because individual behavior, as well as institutions, will adjust to those outcomes (Minsky 1957, 1973).” (p. 4)

    “… to ameliorate the fundamental faults of capitalism, Minsky would euthanize the rentier through lower interest rate policy and—more importantly—by reducing the importance of the private financial system (Minsky 1973). This could be
    accomplished by shifting emphasis away from stimulation of private investment, which relies on external finance, and thus creates financial assets that become part of the rentier economy. Second, he would modestly bias the tax-and-transfer portion of the budget in favor of the poor, although he would not make this the major redistributive mechanism to eliminate poverty (Minsky no date). Rather, he would achieve tight full employment through direct job creation, raising employment and wages at the low end of the labor market while checking the growth of wages and prices in the leading sectors.” (p.12)

    ” …few of Minsky’s followers are aware of his 1960s and early 1970s active pursuit of an ELR program as an alternative to other employment and antipoverty programs. Almost every article he wrote during that period that addressed employment and poverty included a call for direct job creation by the federal government; virtually every letter he wrote offering advice to politicians and policy makers endorsed ELR-type programs. (Again, his correspondence is archived at The Levy Economics Institute of Bard College.) He pointed to the various New Deal
    programs (WPA, CCC, NYA) as models to be developed for a nationwide employment program. Virtually every argument that has been made in recent years in favor of ELR programs had already been made by Minsky during this period…”(p. 13)

    I don’t know that Minsky himself used the phrase “employer of last resort”, but I’ve only seen of “Stabilizing an Unstable Economy” what can be seen through Google Books. But my point is that the four sources you cite – Minsky, Fisher, Keen, and “Austrians” are not univocal in their critiques. Keen was on record – has he changed his mind? – that debt repudiation is necessary to “fix” the economy. I know that Minsky was a student of Schumpeter’s and so there is some “Austrian” thought to his pedigree, but that some “Austrian economists” don’t much care for Minskyan analysis can be seen here:

    If your point is only that Minsky would not have approved of the current policies shoveling money to Wall Street, then he can be cited as you do – but he was by no means opposed to government intervention in the economy. He deemed intervention inevitable – what matters is what’s done.

  14. Bruce Krasting

    Roosevelt ignored Keynes until 1938 when he was trying to build up for war. Deficit spending and Keynesian economics was very late to that story. I have always thought it was a mistake to give Keynes so much credit for ‘solving’ the Great Depression.

    In the smaller recessions that occurred in the post war period deficit spending worked well. This has supported the idea that Keynesian economics works. Again I think that it is a mistake to give all the credit to Keynes. Population growth was more significant in resolving those cyclical slow downs. They were small compared to what happened in 2008.

    Keynes was not an advocate of infrastructure projects as a way of increasing aggregate demand. He thought they took too long to have an impact. A theme that has relevancy today.

    I think that Keynes would crap in his pants if he was here today and learned that his theories would result in a annual deficit that was equal to 10% of GDP. He certainly would not have advocated a public sector debt load that was equal to 100% of GDP.

    Give the poor guy a break.

    1. Siggy

      Don’t agree with the Keyenesian idea of government stimulus. The funds for government spending have to come from the public sector. Effectively, you are borrowing from yourself to boot strap your way to a recovery. Strikes me as crap-think!

      You get out of this mess by reconstituting the currency by backing it with gold and silver. You restructure the fractional reserve banking system by increasing required reserves. You make the calculation very simple in that VAR’s etal are merely dodges that are applied to increase leverage. You legislate that the Fed’s sole responsibility shall be preservation of the currency’s purchasing power.

      You legislate the separation of fiduciary banks from ‘investment’ banks. You ban bank holding companies and financial holding companies. You legislate the regulation of any enterpise that pools funds for the purpose of investment and/or speculation.

      You prosecute financial fraud. You regulate the trade in derivatives. At least one side of a CDS is a speculation. You get FASB to promulgate standards that operate to reveal the true state of an enterprise’s accounts.

      The current cast of players will fight you. Most of the ones who are most vociferious are the very ones who need incarceration.

      As to Keynes, bright guy; but, he didn’t have the answer and his view is deeply colored by the state of the British Empire circa 1920.

      At some point we will have staturated the market with our debt. As we approach that ultimate point of inundation, what will be the general level of interest rates?

      The future looks to be catastrophic.

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