One of the main themes of the post-recession period has been the topic of so-called “Stimulus”.
This includes a variety of measures including central bank programmes, government bailouts and sometimes even private sector partnership programmes all of which are explicitly designed to attempt to stimulate economic growth.
In fact, when we look at the US experience, whether by government or by the FED, we have seen something in the region of $15,000,000,000,000 (that’s $15 trillion) of economic stimulus injected into the US economy since 2008 from both the Federal Reserve and the United States Federal Government.
This is naturally designed to try to boost sluggish growth (and to an extent inflation) and the Federal Reserve has been the most prominent advocate (though, actually, not the most aggressive practitioner on the international stage – we’ll come to that later) of stimulus in order to try to boost the output of the United States (and more broadly, the world) economy.
In this article we intend to examine the validity of stimulus (both central bank, and central government) in assisting growth by examining how much stimulus the United States has undertaken and how much growth it has seen in response.
Part 1: Defining & Measuring Stimulus
When we discuss “stimulus” we must always remember that there are essentially two vectors to take into account.
This includes government programmes such as stimulus cheques, investment, infrastructure spending, welfare spending and more.
Government spending is the most direct form of stimulus as money is usually spent directly into the economy.
Government stimulus usually falls within the remit of government spending statistics and is therefore easier to measure.
Government stimulus policies are always funded by taxation OR government borrowing.
Federal Reserve Stimulus
This includes Federal Reserve led programs such as quantitative easing, business lending programs, emergency liquidity facilities and more.
Central Bank stimulus activity is generally more indirect and relies upon market signals, monetary measures and sentiment.
Central bank stimulus is trickier to measure than Government Stimulus packages due to its usually indirect nature.
The Federal Reserve is effectively self-funding and as such does not fall under the budget of the Federal Government.
In this article we will examine them separately in an effort to pin-down some concrete figures for how much stimulus the combination of the US Government and the Federal Reserve has engaged in within the scope of the United States so that we can attempt to come up with an aggregate total figure for US stimulus over the past 16 years.
Bailouts & Rescues
Starting with the most controversial aspect (because why not?), we can look at the total amount of bailouts engaged in in the wake of the 2008 crisis.
A common misconception, is that it was only a select few Wall St. banks which were bailed out.
The truth is, that the credit-crisis of 2008 was a much broader systematic problem, and as such, the bailouts were far more extensive than people realise.
It included small banks, car manufacturers, mortgage providers, credit unions, large banks, investment banks, insurance firms, even entire markets.
According to usfederalbailout.com  (helpfully compiled by christopherchantrill.com  by using data available from the SIGTARP.GOV  reports). the total bailouts for the Troubled Asset Relief Program saw gross outlays of $4.6trillion (with $3.3trillion in net outlays minus repayments, and $16.9trillion explicit guarantees) between 2008 and 2012.
We are going to use the gross figure here rather than the net outflows or the explicit guarantees because we are obviously evaluating how effective actual stimulus was at generating future growth and as such this must include all gross outlays even if money was eventually recouped.
Naturally, on the other hand, the impact of the promise of money (which is what we see in the explicit guarantee figure) upon market sentiment is not something that can be easily evaluated and ultimately much of the money promised within the explicit guarantees ws never actually paid out so we will focus on the gross outlays.
Lets start adding these figures together into a table.
TARP (FED) Government
One of the main stimulus packages enacted in response to 2008 was ARRA (The American Reinvestment & Recovery Act) enacted in 2009.
The cost of ARRA was actually revised upward in 2019 to a total of $831billion in outlays .
Similarly, since then we have also seen implemented the similar though much larger CARES Act (which saw the return of stimulus cheques) at a combined total budget outlay of $2,200,000,000,000 .
Lets add these into our table and total them up.
From here we will also add all the direct market interventions of the Federal Reserve since 2008 which primarily includes Quantitative Easing  and Operation Twist .
Quantitative Easing (FED)
2008 - Present
Using what I consider some reasonably conservative figures (for instance, we have not weighed-in the automatic discretionary government spending increases which kick-in during a recession) we arrive at a figure of just over $15trillion dollars for combined Federal Reserve and Federal Government stimulus spending since the Great Financial Crisis.
SUMMARY: PART 1
STIMULUS SINCE 2008 EQUATES TO ABOUT $15,331,000,000,000 ($15.331 TRILLION) OF COMBINED FEDERAL RESERVE AND FEDERAL GOVERNMENT ACTION.
Part 2: Introducing GDP
To assess the effectiveness of stimulus, we will look at a statistic called GDP (Gross Domestic Product).
The chart below displays USA GDP since the great recession.
What Is GDP?
GDP is the primary metric by which growth is assessed by mainstream economists.
It contains 4 Primary components:
Private consumption measures the amount of private consumer personal expenditures and by extension the confidence of consumers to spend money and purchase goods and services.
This component measures business investment in non-consumable assets (such as plant machinery and property) and can be seen as a general measure of business confidence to invest for the future.
Government expenditures is a simple measure of how much raw money the government is spending over the course of time and can be used to demonstrate how big an actor the government is within the economy itself. Naturally we can also observe the scope of government-funded stimulus in this statistic as well.
Net exports are a measure of the nations total foreign trade and is expressed via a ratio. Positive net exports show that a nation exports more total goods and services than it imports. Negative net exports show that a nation exports more goods and services than it imports (and usually this “slack” has to be compensated for by private consumption or government spending).
Taken together as an aggregate in the form of GDP, these are considered a broad measure of how wealthy the nation is, and how strong the growth within its economy is.
Here is a chart which shows GDP per annum from the Great Financial Crisis era to present-day.
From this, we can see what the actual year-on-year rate of growth in GDP actually is for the United States.
This demonstrates how quickly the US economy is growing every year as a result of the increases or decreases in economic activity within the economy itself.
For example, if we look on the chart to the right, we can clearly see the Great Financial Crises of 2008 is visible by observing the extreme dip in the chart which shows the economy contracting (along with the subsequent recovery which followed it) which occurred between 2008 and 2010..
From here, what we can do is take these statistics and start building a data table from them in order to run a more useful set of comparisons which will ultimately let us weigh-up how successful the Federal Government and the Federal Reserve stimulus has been in utilising stimulus to support the economy and generate growth.
Factors Which Influence GDP
As explained earlier in this article, the four components of GDP are:
The most important thing to remember when examining GDP or indeed it’s components is that all of these components can influence GDP growth. However, only 3 of these components of GDP are actually influenced by genuine economic activity growth.
There are also several factors which do not equate to increased productivity or economic growth yet are often still included within other components of GDP and therefore can artificially boost the GDP figures.
Lets take a deeper look…
One of the primary factors influencing GDP is of course raw population numbers (which are usually a consistent growth factor within a nation).
Population is a factor which can artificially drive GDP because a nation may indeed gain more people but at the same time population increases do not necessarily result in added economic activity or productivity on a per-person basis and especially if the people in question are not gainfully employed (e.g. if the overriding employment trends are for low productivity jobs or similar factors).
This can be an aggravating factor to overall productivity and, especially if a majority of the population consume more wealth than they create, the GDP boosts which result from population are more of a warning sign than a benefit for the nation in question.
Therefore if we are using GDP as a reference for economic growth and productivity we have to adjust our GDP figures to account for this.
We can adjust for this by looking at GDP and (thus GDP growth) on a per-capita (per person) basis using the GDP per Capita metric to account for the growing population and really see how productive each individual is within the economy.
The equation we will use to do this is as follows:
As we can see, once we adjust for a growing population, the bona-fide economic output growth figures have to be adjusted-down (sometimes by as much as 1%).
Lets update our table with these figures.
|Year||GDP ($)||Annual GDP Growth||Annual GDP Growth (Percentage)||Population||GDP Per capita||Annual GDP Per Capita Growth||Annual GDP Per Capita Growth (Percentage)|
The statistic which results from this equation is called “GDP Per Capita”.
Similarly, another de-facto component of GDP which is not related to productivity is government expenditures.
Government spending has exploded over the past two decades and of course, is also primary factor in economic stimulus.
Not only this, but government expenditure is a regularly occurring actual component of GDP which can artificially boost it.
So lets adjust our GDP growth figures to account for government spending alongside the previous adjustment we made to account for population growth.
The equation we will use here looks like this:
As we can see, because government expenditure ultimately contributes roughly 30% of per-capita GDP, once we adjust for this, our bona-fide GDP-per-capita figures have to be revised down.
We will refer to the statistic which results from this equation as “Private GDP Per Capita”.
|Year||GDP ($)||Annual GDP Growth||Annual GDP Growth (%)||Population||GDP Per capita||GDP Per capita Growth (%)||Government Total Expenditures||Private GDP||Private GDP Per Capita||Private GDP Per capita Growth (%)|
Another important factor to consider when we examine statistics relating to growth and finance, is the background influence of inflation.
Inflation is a factor of growth which drives up prices and valuations over time (degrading the value of the base-currency little-by-little) and indeed, the Federal Reserve sets a target of keeping inflation at 2% per annum.
Inflation is fairly sluggish in modern times (and this is examined in another future article) however is still a factor which must be taken into account and especially because so far, we have used nominal figures which have not accounted for the influence of inflation.
To factor inflation into our calculations, we will use the appropriate Federal Reserve Implicit Price Deflator tools and convert our nominal values into real values.
These helpful time-series are essentially gauges of inflation over the past 60 years and in subtracting a price deflator from the appropriate time series, we can adjust our values from gross values to what is often referred to as “real” values.
And here is the data table for this chart.
|Year||GDP ($)||Annual GDP Growth||Annual GDP Growth (%)||Population||GDP Per capita||GDP Per capita Growth (%)||Government Total Expenditures||Private GDP||Private GDP Per Capita||Private GDP Per capita Growth (%)||GDP Deflator||Real Private GDP Per Capita||Real Private GDP Per Capita Growth|
As we can see, once we account for inflation we end up with a statistic which we will refer to as “real private GDP Per-Capita” and as you can see, once inflation is taking into consideration, our GDP figures must be revised downwards again.
And from here we actually have a bona-fide genuine measure of how much real economic growth we have observed in the USA since the 2007/2008 financial crisis and from there we will be able to make a genuine assessment of how effective stimulus has been.
SUMMARY: PART 2
- GDP IS THE MAIN METRIC BY WHICH WE ASSESS GROWTH.
- HOWEVER, GDP IS ARTIFICIALLY INFLATED BY FACTORS SUCH AS INFLATION, GOVERNMENT EXPENDITURE AND POPULATION.
- BY ADJUSTING FOR THESE FACTORS WE ARRIVE AT A MORE BONA-FIDE MEASURE OF GDP WHICH ASSESS HOW MUCH PRIVATE GROWTH IS OCCURRING WITHIN THE ECONOMY.
Part 3: Analysis
First, before we examine how valid stimulus is as a tool to stimulate growth, lets examine this dataset and see exactly where the economy is at in real terms.
The obvious starting point here is to summarise our findings.
This is relatively simple. We can take the Real Private GDP Per Capita statistic as we have established from 2007 – 2020, and isolate it.
|Real Private GDP Per Capita||34560.76||34652.75||33018.17||30200.14||30797.24||31626.60||33286.94||34209.77||35118.47||36187.65||36457.26||37192.95||38006.10||38455.86||31594.39|
|Real Private GDP Per Capita Growth||0.27||-4.72||-8.53||1.98||2.69||5.25||2.77||2.66||3.04||0.75||2.02||2.19||1.18||-17.84|
As Some Of You May Have Noticed….
Real Private GDP Per Capita in 2007 was quantified at 34562.75.
YET… Real Private GDP Per Capita in 2020 was quantified at 31594.39.
This amounts to net growth of -8.58% from 2007 to 2020.
So, the private sector US economy is actually SMALLER now, in 2021, than it was in 2006.
Discounting the influence of government intervention, inflation and raw population growth upon our statistics, the average US citizen has lost more than $2000 from the value of their consumption habits and quality of life.
In fact, if we add-up all the growth year-to-year from 2007 to the end of 2020:
We can see that net growth is indeed STRONGLY NEGATIVE for this period.
I would propose that the reason for this, is that the combination of the Great Financial Crisis and the COVID-19 recession wiped out so much value that ultimately, the very weak private sector growth during the intra-recession period from 2010 – 2019 simply did not produce enough growth to compensate for and keep-up with the scale of the contractions which are taking place during modern recessions and economic crises.
An Example Of This…
If we exclude the years in which contractions took place, then the positive real private GDP per capita growth from 2007 to 2020 is 24.80%.
This amounts to average annual growth of just 1.90% per annum over 13 years.
This growth in itself was ultimately wiped out by the aggregate contraction experienced during the Great Financial Crisis and the COVID-19 Pandemic.
Factoring these two crises together, they contributed a contractionary force of of -31.09% which averages –2.39% per annum over this same 13 year period.
This leaves private sector annual growth at an average annual net contraction of -0.48% per annum over the same period.
Factoring In Stimulus
Keeping this in mind, we must therefore question whether stimulus achieved anything whatsoever?
Ultimately, was it worth it?
If we return to our table of stimulus spending a moment, we can average this data out to give an average “Stimulus Per Annum” figure between 2007 and 2021 and divide it up into our original table of metrics in a similar basis to compare it to the actual figures for growth.
|Stimulus Quantity||Date Range||Average Outlays ($) Per Annum|
2007 - 2020
So, as such, to really establish the validity of stimulus:
We would need to see average real private growth equivalent to $1,171,615,384,615 ($1.171trillion) across the entire economy every year between the Great Financial Crisis and the end of 2020 in order to “break even” and demonstrate some positive returns.
We need to break-down stimulus-per-annum on a per-capita basis and adjust it in a similar way to our previous statistics in order to see whether the returns for stimulus are greater than the costs.
Lets add our figures into our original table to see if there are any real returns we can point in for stimulus spending in GDP terms.
|Year||GDP ($)||Annual GDP Growth||Annual GDP Growth (%)||Population||GDP Per capita||GDP Per capita Growth (%)||Government Total Expenditures||Private GDP||Private GDP Per Capita||Private GDP Per capita Growth (%)||GDP Deflator||Real Private GDP Per Capita||Real Private GDP Per Capita Growth (%)||Average Stimulus Per Annum||Average Real Stimulus Per Annum||Average Real Stimulus Per Capita Per Annum||Real Private GDP Per Capita Growth (in $)||Real GDP-Per-Capita Returns Per $1 Of Stimulus Per Annum||Average Real GDP-Per-Capita Returns Per $1 Of Stimulus Per Annum|
As we can see, even if we assume 100% efficiency (which is a lot to assume), each $1 of stimulus spending per year can be demonstrated to deliver far less than $1 of real private GDP-per-capita growth.
In fact, the average returns per $1 of stimulus spending over the 14 year period between 2008 and 2020 are negative – yielding on average $-0.19 of real bona-fide private GDP-per-capita growth per $1 of stimulus.
And this is why stimulus (whether by the federal reserve or the central government) has a very very very low rate of efficiency – because the effect on genuine GDP growth is very very minimal compared to the outlays and the overwhelming majority of it ends up being wasted.
SUMMARY: PART 3
- THE US ECONOMY LOST -8.58% IN REAL PRIVATE PER-CAPITA GDP BETWEEN 2007 AND 2020
- THIS IS BECAUSE THE COMBINATION OF THE GREAT FINANCIAL CRISIS AND THE COVID-19 CRISIS WIPED OUT MORE VALUE THAN THE ECONOMY GENERATED IN-BETWEEN THESE CRISES DUE TO HISTORICALLY SLUGGISH GROWTH.
- THIS OCCURED IN SPITE OF THE ECONOMY RECIEVING $15TRILLION OF FINANCIAL SUPPORT FROM THE FEDERAL RESERVE AND THE FEDERAL GOVERNMENT.
- STIMULUS, WHEN AVERAGED OUT PER ANNUM ACTUALLY DEMONSTRATES NEGATIVE RETURNS OF $-0.19 PER $1 OF STIMULUS PER-CAPITA OF GDP.
- THEREFORE THE OVERWHELMING MAJORITY OF STIMULUS IS WASTED AND DOES NOT SPUR OR GENERATE ANY SUBSTANTIAL GROWTH IN REAL GDP-PER-CAPITA.
Part 4: Conclusion - Why Doesn't Stimulus Work?
As we can see, it’s pretty clear that whether at the government or the Federal Reserve level, stimulus hasn’t worked.
We must now ask precisely why it hasn’t worked and try to come up with an explanation.
There are likely multiple factors within this issue so lets go over some possible explanations.
1. Government Stimulus Is Largely Funded By Debt And Taxation
At the government level, stimulus programmes are usually funded by deficit-spending.
So, for every $1 of GDP growth which may be generated from stimulus, there is another $1 of longer-term liabilities which are generated along with it which must be paid-off by taxing wealth.
Indeed, we can see that since the “bailout era”, the trajectory of government debt has accelerated.
The problem with government debt as stimulus, is that as demonstrated previously, stimulus ultimately incurs at a loss (because as demonstrated previously, each $1 of stimulus spending creates far less than $1 of real private GDP-per-capita growth).
This means that this debt is not generating an income stream to service itself and generate returns and thus, is accumulating far more quickly than it can be paid down.
Of course, on the governments side, these liabilities must be funded by taxation sooner or later which itself is a dampening factor upon growth.
Not only this, but the enormous accumulation of debt which occurred between 2006 and the present era is absorbing huge amounts of income (at both the personal and business and government level).
This builds up a huge deflationary burden within the broader economy.
There is also the fact that, whether or not we agree that debt has any real macro-effects, it has detrimental effects on sentiment at the very least and this changes peoples’ consumption habits (especially if the consumer themselves is similarly leveraged).
2. Worsening Financial Crises
Despite what people like to believe, the unfortunate facts of the data seems to suggest that recessions are getting worse.
We can see this by looking at a longer-term Real GDP Per Capita chart.
As you can see, the trend of contractions taking place from recession-to-recession are getting deeper.
This could be manageable if the US was seeing strong intra-recessionary period growth however we can see this is not the case because ultimately, as we can recall from our deconstruction of the GDP statistics, year-on-real Real GDP Per Capita growth is slowing over the long term.
So ultimately, the problem here, and the reason that GDP is already negative in terms of Real Private GDP Per Capita, is that recessions are wiping out more value from peoples’ lives than the economy is creating in bona-fide GDP terms in-between recessions.
This points to a weakening of the US economy over the long run with growth slowing and increasingly severe contractions negating the aggregated growth during expansions.
3. Federal Reserve Stimulus Doesn't Actually Do Anything
On the left we can see the Federal Reserves’ balance sheet over the past 20 years.
This shows roughly how much stimulus the Federal Reserve has engaged in via the Quantitative Easing asset purchasing programme.
The general consensus is that this programme results from “money printing” and of course the fear from various quarters since 2008 has been that “hyperinflation” would result from this.
However, if we look at the data from https://inflationdata.com/Inflation/Inflation/DecadeInflation.asp we can observe the following points:
- Inflation over the last 100 years has averaged only 3.13%
- Inflation for the 2000 – 2010 period averaged only 2.54%
- Inflation for the 2010 – 2019 period averaged only 1.75%
So, as we can see, the forecasts of hyperinflation or even aggressive inflation as a result of Federal Reserve or government policy never ultimately came to fruition.
In fact average inflation is effectively slowing over the long-term in spite of short term spikes..
It’s a fairly simple and well-observed fact that “money printing” creates inflation.
As such, because of the low inflation we’ve seen over the past decade and a half, it seems elementary that ultimately, no “money printing” has taken place.
The reason for this, is that ultimately the FED’s quantitative easing programmes and balance sheet expansions are not actually about “money printing” in the sense we interpret “money” and is actually about the creation of reserves for the use of primary dealer member banks (such as Goldman Sachs and JP Morgan) so that liability swaps may take place.
|Expansionary Monetary Policy|
|STEP 1:||When the Fed buys government securities through securities dealers in the bond market, it deposits the payment into the bank accounts of the banks, businesses, and individuals who sold the securities.|
|STEP 2:||Those deposits become part of the funds commercial banks hold at the Federal Reserve and thus part of the funds commercial banks have available to lend.|
|STEP 3:||Because banks want to lend money, to attract borrowers they decrease interest rates, including the rate banks charge each other for overnight loans (the federal funds rate).|
If we read St. Louis FED’s summary of open market operations at https://www.stlouisfed.org/in-plain-english/a-closer-look-at-open-market-operations as presented on the left.
St. Louis Federal Reserve state:
As such, the Federal Reserve creates reserve deposits and the implication from this is that ultimately the banks can use them to hand-out during loans.
This is slightly misleading however… because yes, they form part of member-banks reserves, but crucially, the banks can only lend-against them rather than being able to lend and spend them out directly.
If we read the IMF working paper on money creation at: https://www.imf.org/-/media/Files/Publications/WP/2019/wpiea2019285-print-pdf.ashx
The IMF clarify this in their statement on private and central banking:
Similarly, within the same paper, the Chicago Federal Reserve state:
That is to say, money creation is the responsibility of private-sector banks as part of the fractional reserve banking system and during the process of Quantitative Easing, The Federal Reserve primarily creates “reserve collateral” which, although it can be used to purchase bonds and such from primary dealer banks, it still remains in the FED in various primary members reserve accounts and behaves as their collateral reserve.
This seems like a bizarre system when we consider that the FED is giving money to banks but not allowing them to loan it or spend it. However, we can ultimately see this as a liability swap – from private banking systems to the FED.
In reality the official view of the FED is that the reserves are created in order for the primary banks to lend against.
Therefore the creation of central bank reserves is carried-out so that private banks have a broader collateral base to back and support their lendings without becoming too overleveraged and of course the FED creates these reserves for the banks in exchange for receiving treasuries from the banks as a means to lowering interest rates.
However, the banks themselves, know that because they don’t have access to the money to spend (because reserves are not convertible into readily liquid “cash” in the sense we understand it), that the collateral is no actual use to them and subsequently, despite the huge expansion of the monetary base, the banks never stepped-up lending to any significant degree after the credit crunch.
Thus, during the process of QE, the FED ends up replacing high-quality very liquid collateral (e.g. Treasuries) with illiquid low-quality capital (Reserves).
As such, quantitative easing and the Federal Reserves’ asset purchasing programme didn’t ultimately achieve anything.
In fact, it arguably harmed the monetary system by depriving banks of high-quality capital (treasuries) and replacing them with illiquid funds (FED reserves) in Federal Reserve member accounts. Thus the banks, knowing that the quality of their collateral was being eroded, were wary about boosting lending for many years after the Great Financial Crisis.
4. Stimulus Programmes Are Too Small
As we read previously in this piece, the actual efficiency rate of stimulus is very low and ultimately every $1 of government stimulus creates a negative $-0.19 of real private GDP growth.
I consider that a possible reason for this is that government stimulus programmes are simply too small.
For example, the stimulus cheques in 2020 cost approximately $290,000,000,000 ($290billion).
To put this in context, although this sounds like an absolutely gigantic number… this equates to sum equivalent to approximately just 1.36% of US GDP for the year.
As such, it’s completely unrealistic to expect the recent stimulus programmes to accomplish very much in the way of boosting GDP (especially since we know that stimulus dollars have a very low rate of efficiency) because although the numbers involved in stimulus packages are enormous, they are still usually too small relative to the size of the US economy.
Combined with their very low rate of efficiency, there is simply no way they can be expected to have any real lasting impact upon GDP.
The United States’ experience of stimulus shows that ultimately stimulus money has been wasted as it demonstrates a negative rate of return.
Furthermore, government spending and Federal Reserve outlays both have such low rates of efficiency that they ultimately lead to very negative outcomes such as the accumulation of government debt and the depletion of the Federal Reserves’ monetary measures..
And ultimately, on a market sentiment basis, these have very negative influences because the market does take these negative factors into account.
The alternative to stimulus programmes is that the government & Federal Reserve need to look at the broader issue of why growth is so weak in the first place and especially why the long-term trend on growth is showing that financial crises are getting worse.
Reasons for this include the west’s slowing productivity, the national debt burden, the dollar liquidity crisis, and so forth.
These are issues which ultimately have not and cannot be solved with short and sharp bursts of government spending or Federal Reserve activity and require a concerted national effort to address.
This means that stimulus won’t ever have the impact our leaders hope and especially not as long as they try to avoid the broader issues which weigh-down growth within society as a whole.