How Much Did the Stimulus Affect Unemployment? Not Much

stimulus and spending

While the New York Fed is increasingly tasked with regulating financial institutions, its bread and butter is economic analysis. A recent report debunks the theory that the stimulus spending lowered unemployment.

James Orr, vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, and John Sporn, a senior analyst in the Federal Reserve Bank of New York’s Markets Group, analyzed $860 billion (6 percent of GDP) stimulus contained in the 2009 American Recovery and Reinvestment Act, adopted in the context of rising unemployment rates.

Their analysis of the distribution of ARRA funds across states shows that the expanded assistance to unemployed workers was highly correlated with state unemployment rates. However, most other state allocations had little association—positive or negative—with state unemployment rates. You can see that reflected in the chart above.

In this battle of Keynes vs. Hayek, it looks like Hayek won.


2 Responses to How Much Did the Stimulus Affect Unemployment? Not Much

  1. Timothy Burch March 19, 2013 at 9:40 am #

    This graph has NOTHING to do with how spending affected (i.e., influenced) unemployment rates as you imply….you’ve reversed the causality!! The study the authors perform tries to establish whether states with higher existing unemployment rates at the onset of the crisis received more federal stimulus dollars. It concludes they did not. One can argue this doesn’t speak highly of how efficient the stimulus act was in targeting states that needed the most help, but the graph you’ve shown adds nothing to answer the question you actually pose — your headline is terribly misleading.

  2. Doug Cornelius March 19, 2013 at 10:36 am #

    If the stimulus affected unemployment there should be some correlation between the money spent per capita and the unemployment rate. The chart shows a lack of correlation.

    The study showed that there was not a link between how the stimulus money was allocated and the state’s unemployment rate. So if the stimulus money was effective, we should see some correlation between the stimulus spending per capita and unemployment rate.

    I agree that the headline is misleading. A lack of evidence does not mean that something does not exist. This chart is just one piece of evidence. I would have been happier if that correlation line sloped downward.