Where did stimulus money go?

How a Trillion dollars went down the drain. Families used the money to pay down credit card debt and hunker down. Grants to states were used to temporarily shore up state finances, -- without requiring them to cut spending -- and to expand Medicare. Federal and state purchases of goods and services, which could have been stimulative, were negligible. The state finances are in ruin, the Federal deficit has exploded, the money's gone, and there was no stimulus.

Other than that, Mrs. Lincoln, how was the play?

Byron

Where Did the Stimulus Go?

During the recent recession, the U.S. Congress passed two large economic stimulus programs. President Bush’s February 2008 program totaled $152 billion. President Obama’s bill, enacted a year later, was considerably larger at $862 billion. Neither worked. After more than three years since the crisis flared up, unemployment is still very high and economic growth is weak. Why have such large sums of money failed to stimulate the economy? To answer this question, we must look at where the billions of stimulus dollars went and how they were used.

Nearly half of all stimulus-program grants to states have been funds for Medicaid, the primary state-government health-care program for low-income families. These grants were designed to achieve the Obama administration’s goal of increasing health-care coverage by expanding government health-care programs.
But that goal is a far different one from stimulating aggregate economic activity. Medicaid grants were unlikely to provide much if any stimulus to aggregate economic activity, and they haven’t. Moreover, these grants appear to have caused state governments to shift funds away from purchases of goods and services and into their Medicaid programs.

To sum up: the 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.