Over the weekend, Paul Krugman responded to my post in which I show that the slowdown in state and local government purchases of goods and services is a consequence, rather than a cause, of the weak recovery. My basic point is that state and local tax revenues have flattened out because of the persistently weak economy and this has resulted in fewer purchases.
Krugman does not register any disagreement with this finding. Instead he resorts to arguing that the finding is inconsistent with my earlier fiscal policy research on discretionary stimulus packages, citing my congressional testimony in February 2011. But Krugman is wrong about this earlier research.
Here is what I said in that testimony about the ARRA stimulus package as well as previous temporary fiscal actions:
My empirical research during the past two years shows that ARRA did not have a significant impact in stimulating the economy. I do not think this finding should come as a surprise. Earlier research on the discretionary countercyclical Economic Stimulus Act of 2008— enacted three years ago this week—indicates that it too did little to stimulate the economy. Research on the discretionary countercyclical actions in the late 1960s and 1970s—the most recent period of such large interventions prior to this past decade—also shows disappointing results…
The empirical research referred to in the testimony found no significant positive effect of the temporary ARRA funds on state and local government purchases, but it did find large and significant effects from more lasting changes in revenue from tax receipts. These responses of state and local governments reflect, among other things, the distinction between temporary and more persistent changes in income. For similar reasons consumers respond differently to temporary versus permanent changes in income, which is why the temporary 2008 stimulus had little effect. So there is no inconsistency between that empirical research and my recent post.
Moreover, despite Krugman’s accusations to the contrary, it is not only during the Obama Administration that I find that such temporary discretionary fiscal actions have had little positive effect. As the above quote from my February 2011 testimony makes clear, I also found little positive effect from the discretionary fiscal actions during the Bush Administration in 2008 as well as from discretionary fiscal actions during the administrations in the late 1960s and 1970s—Johnson, Nixon, Ford, and Carter.