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Whither the billions?

John F. Cogan is the Leonard and Shirley Ely Senior Fellow at the Hoover Institution and a professor in the public policy program at Stanford University. He served as deputy director of the Office of Management and Budget in the Reagan administration. John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford and the George P. Shultz Senior Fellow in Economics at the Hoover Institution. He was undersecretary of the treasury in the George W. Bush administration.
Professors Cogan and Taylor have collaborated on answering the question “Where did the stimulus go?” It’s a good question. Their answer isn’t exactly “down a damn rathole,” but it’s close enough for government work:

[T]he federal government borrowed funds that it mainly sent to households and to state and local governments. Only an immaterial amount was used for federal purchases of goods and services. The borrowed funds were mainly used by households and state and local governments to reduce their own borrowing. In effect, the increased net borrowing at the federal level was matched by reduced net borrowing by households and state and local governments.
So there was little if any net stimulus. The irony is that basic economic theory and practical experience predicted this would happen. If policymakers had only remembered what Milton Friedman, Franco Modigliani, and Ned Gramlich had said, we might have avoided these two extremely costly policy failures.

It’s an interesting article.

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