The bottom-line is the federal government borrowed funds from the public, transferred these funds to state and local governments, who then used the funds mainly to reduce borrowing from the public. The net impact on aggregate economic activity is zero . . .
The lesson is to beware of politicians proposing public works and other government purchases as a means to stimulate the economy. They did not work then and they are not working now.
Odds are Keynesians will quickly respond that transfer to state governments and actual public works purchases are not the same thing – something on which they were fairly quiet when they helped the president sell the stimulus last year.
There is something else, though, that has been overlooked: the Stimulus essentially became a vehicle for states and localities to temporarily deleverage themselves (i.e., reduce their debt levels), but they’ll either have to “releverage” when the money runs out or engage in the retrenchment that the stimulus delayed.
In other words, the president’s stimulus has created at government bubble, in which state and local governments look healthier than they really are.
The “dot-com bubble” led to the recession of 2000-1; the housing bubble led to the Great Recession. What will be the result of the inevitable popping of the government bubble?