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Senate Budget Committee Chairman Kent Conrad (D-ND) talks with reporters about the economic stimulus legislation in the U.S. Capitol February 6, 2009 in Washington, DC. Senators from opposing parties are working on a compromise to the economic stimulus legislation proposed by President Barack Obama and passed by the House of Representatives.

Congress passed the American Recovery and Reinvestment Act in February of 2009. If you will recall, at the time it was touted by its proponents as an economic treatment for the recession caused by the housing financial crisis that preceded it. But did it do its job?

In trying to determine if the stimulus package worked, we first need to define what “worked” means in this context. What is success for a stimulus package?

When the stimulus was being considered in 2009 the Council of Economic Advisors released a report predicting what would happen to the U.S. economy if the package was passed and contrasted this with what would happen if it didn’t pass. The unemployment rate was predicted to peak at just over 9 percent during 2010 and run between 8 percent and 8.5 percent in early 2011 if the stimulus package did not pass. With the stimulus, the unemployment rate was supposed to peak at just under 8 percent at the end of 2009 and would run between 6.5 percent and 7 percent for the first half of 2011.

In reality, the unemployment rate peaked at 10.1 percent in October of 2009 and is currently inching down slowly to its most recently reported values 8.3 pecent. Clearly, by the standards of the CEA report, the stimulus did not “work.” In fact, one might argue it worked negatively, since the actual outcome was worse than what was predicted if congress did not act.

But the problem with such comparisons is that it is difficult or impossible to establish a counterfactual. What really would have happened if the stimulus had not passed?

Proponents argue that the stimulus helped because things would have been even worse without it. Unfortunately, the validity of that argument cannot be tested, since we can't rerun the economy starting February of 2009 without the stimulus.

Over any lengthy span of time a great number of random, unpredictable events will occur that effect the economy. If we could rerun the economy a thousand times we would get a thousand different sets of random outcomes. If these events really are random and unpredictable before they happen, it is pointless to argue that something different should have been done.

Rather than ask if a policy was appropriate given what we know now, a more important question is if the policy was appropriate given what was known when it was put in place.

The notion of fiscal stimulus is based on the work of John Maynard Keynes, who wrote much of his most influential work based on his observations of the Great Depression. Keynes argued for government spending as a way to stimulate the economy because he observed firms and workers ready and willing to produce goods and services at the prevailing prices if only they could find someone willing to buy. If this is really the case, then government spending leads to purchases that would not otherwise occur.

Traditional Keynesian theory argues that a $1 increase in government spending will lead to a much more than $1 increase in economic activity because the workers and firms that sell to the government will earn income which they will, in turn, spend on other goods. This is the notion behind a government spending “multiplier.”

Suppose, however, that firms did not stand ready to produce any amount of goods at prevailing prices. Instead, suppose that when the government buys goods it increases the demand and causes prices for the goods it buys to rise. In this case, the higher price will make private consumers and firms cut back on their purchases and the government ends up “crowding out” private purchases. In this case the government multiplier may be a number less than one, possibly even close to zero. That is, a $1 increase in government spending increases economic activity by less than $1 or perhaps by nothing at all.

Professor Robert Barro of Harvard University has estimated that unexpected increases in government military spending have multipliers of .8 or so. This is in sharp contrast to multipliers of 1.5, 2.0 or even 3.0 that are assumed in some traditional Keynesian models.

So did the 2009 stimulus package work? No, in the sense that it did not work as advertised. The actual performance of the economy has been much worse than the worst-case scenario envisioned in early 2009. One reason for this failure may be that fiscal stimulus is really not as effective in our modern economy as it might have been in the 1930s. There are, of course, other methods for stimulating economic activity. These would include reducing taxes on economic activity, particularly on investment in new capital goods.

Does the economy need another stimulus to avoid a “double-dip” recession? Given what I observe from the last stimulus package, I would say no.

Kerk Phillips is an associate professor of economics at Brigham Young University.