Last winter, when economies worldwide were in free fall, governments everywhere enacted stimulus plans. While the United States passed the biggest, a number of other countries were close behind.
Many of the stimulus plans included policy changes that were in effect by the second quarter of 2009. Since economic data for the second quarter are now available, it is possible to obtain a first glance at the success (or lack thereof) of stimulus efforts.
The accompanying chart provides a scatter plot that relates the size of the economic stimulus between 2008 and 2010 to the rate of economic growth for a sample of OECD countries. Each dot in the chart characterizes the data for a given country. For example, Korea had a stimulus bill that was almost 5 percent of GDP, and posted second-quarter growth of about 2 percent. The line in the chart is a regression line through the data points that reveals the central tendency.
The chart suggests that the stimulus efforts helped boost economic growth in the second quarter. Countries that enacted larger stimulus bills grew faster than those that did not.
The regression line through the data is statistically significant, and steep enough that one might guess that a chart like this will be appearing soon at a White House near you.
But the relationship is hardly compelling evidence that Keynesian policies were successful. First, the most influential data point in the chart is Hungary, which posted very disappointing growth in the second quarter, and actually enacted a tax increase. The data point is so influential that the relationship between stimulus and growth disappears if we remove it. Cash-starved Hungary increased its VAT from 20 to 25 percent because of the threat that the nation would default on its debt. That this tax hike is associated with weak economic growth is hardly a Keynesian phenomenon.
Second, there was a large difference of opinion among the countries in the chart about how best to stimulate the economy. Korea, for example, adopted a suggestion from Candidate McCain and, among other things, reduced its corporate tax rate. That choice appears to have been a good one. The U.S., on the other hand, took its stimulus bill right from the Keynesian playbook, and got unimpressive bang for the buck. If the U.S. stimulus bill were as effective as the typical OECD policy, then its growth rate would have been about a percent and a half higher in the second quarter. The Obama administration has little to crow about.
As data dribble in over the next few quarters, it seems likely that an updated version of this chart will continue to show at least some positive relationship between stimulus and economic growth. The argument against a big Keynesian stimulus has never been that it will have zero effect. The real problem with U.S. policy will be evident in the medium term, when taxes are hiked to pay the bill for the government's current largesse and the U.S economy finds itself in the same spot Hungary was in in the second quarter. At that point, we will wish that we had taken a path more like Korea's.
Kevin A. Hassett is a senior fellow and the director of economic policy studies at AEI.