My testimony summarized the results of studies conducted at Stanford during the past three years examining the empirical impact of the policies (the studies are described in the appendix).So the stimulus has not stimulated. It has created regime uncertainty however. Again this shows that New Zealand's somewhat low-key approach to the crisis may have been the right one.
One simple fact which I reported received considerable attention in the senators’ discussion. It was that only $2.4 billion of the $862 billion in the 2009 stimulus package (ARRA) has been spent on federal infrastructure—three-tenths of a percent. More may have resulted at the state and local level but there is no clear connection between the federal grants and such spending.
More generally I reported that on balance the federal policy responses to the crisis have not been effective. Three years after the crisis began the recovery is weak and unemployment is high. A direct examination of the fiscal stimulus packages shows that they had little effect and have left a harmful legacy of higher debt. The impact of the extraordinary monetary actions has been mixed: while some actions were helpful during the panic stage of the crisis, others brought the panic on in the first place and have had little or no impact since the panic. The monetary actions have also left a legacy of a large monetary overhang which must eventually be unwound.
I am frequently asked what I would have done differently. It turns out that I testified before the same Senate Budget Committee two years ago in November 2008 and recommended a specific four part fiscal policy response to the crisis. The response was based on certain established economic principles, which I summarized by saying that policy should be predictable, permanent and pervasive affecting incentives throughout the economy.
But this is not the policy we got. Rather than predictable, the policy has created uncertainty about the debt, growing federal spending, future tax rate increases, new regulations, and the exit from the unorthodox monetary policy. Rather than permanent, it has been temporary and thereby has not created a lasting economic recovery. And rather than pervasive, it has targeted certain sectors or groups such as automobiles, first time home buyers, large financial firms and not others. It is not surprising, therefore, that the policy response has left us with high unemployment and low growth. Given these facts, the best that one can say about the policy response is that things could have been even worse, a claim that I disagree with and see no evidence to support.
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