Hot of the press, a short research report from Kevin A. Hassett at AEI. The above chart probably doesn’t show the stimulus-growth correlation you think it does. Read on for the regression details:
Looking at the second quarter GDP data, we can begin to see the effects of the various stimulus packages adopted earlier this year. The data show that Keynesian stimulus has had a positive effect on growth, although results vary greatly across countries.
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.
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