States didn’t actually spend stimulus money.

This is a significant bit of research by John Taylor. He claims that states did not actually spend stimulus money. The incompetence is staggering.

That is an important lesson for the next recession. I.e. it is no use just taking the horse to water: you’ve got to make it drink as well. States need to be specifically told not to sack staff (which is what did in this recession), and if anything, to actually take on additional staff, as well as increasing their spending.

Also Taylor argues in a separate post that other forms of stimulus are ineffective because of consumption smoothing. Or as he puts it, “This is exactly what the permanent income or life cycle theories of Milton Friedman and Franco Modigliani tell us. People largely saved the injection of cash.”

Now there is a problem there. If everyone smooths their consumption to perfection, recessions would be almost unheard of! Households which found themselves underwater would carry on spending as before. And if they did reduce spending a bit, those who lost income as a result of less demand coming from underwater households would not cut their weekly spending either.

Well I don’t buy it. Recessions DO OCCUR.

Plus there are four studies here which DO FIND a relationship (surprise, surprise) between changes in household income and changes in household expenditure. See:

http://onlinelibrary.wiley.com/doi/10.1111/j.1745-6606.1984.tb00322.x/abstract

http://www.nber.org/digest/mar09/w14753.html

http://www.kellogg.northwestern.edu/faculty/parker/htm/research/johnsonparkersouleles2005.pdf

http://finance.wharton.upenn.edu/~rlwctr/papers/0801.pdf


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