Thursday, February 18, 2010

stimulus success

It was a year ago this week that President Obama signed the American Recovery and Reinvestment Act (ARRA), also known as the “stimulus bill.” He had been in office for less than a month.

In late January of last year, President Obama took office facing the worst economic crisis since the Great Depression (and with two wars going badly and a trillion dollar deficit). He sought bipartisan support for legislation to help turn around the economy. Since interest rates were already at the “zero bound,” representing the limit of traditional monetary policies, primary reliance would have to be on fiscal policy. Despite analyses from his own Council of Economic Advisors that
a fiscal stimulus of roughly $1.2 trillion was necessary, President Obama cut it back to less than two-thirds of that size in an effort to accommodate Congressional Republicans. Over one-third of the stimulus ($288 billion) took the form of tax cuts for over 95% of all Americans. This was done to appeal to Republicans, despite warnings that those tax cuts would likely be saved rather than spent, diluting their stimulative effect. It constituted the largest two-year tax cut in US history. Despite those efforts at bipartisanship, not a single Republican in the House voted for the bill and only three Republican Senators voted for it (one of whom, Arlen Specter, later became a Democrat after being ostracized by his former party for that treasonous act of bipartisanship). Less than a month into the new administration, in the middle of a national crisis, Congressional Republicans had already settled on a strategy of total opposition and obstruction.

So despite the ARRA being too small and too tilted toward tax cuts – in the name of bipartisanship – how has the economy done during President Obama’s first year?

This chart provides a good summary of course of unemployment over the past two years. In the first three months of 2009, before the ARRA had begun to take effect, the US economy lost an average of over 750,000 jobs a month. A year later, we are pretty close to having stopped the job losses. We still have a very deep hole to climb out of, but you can’t get better until you stop getting worse.

[click on image to enlarge]

GDP numbers tell a similar story. During the fourth quarter of 2008,
GDP declined at a staggering rate of 6.3%. In the fourth quarter of 2009, it rose by an estimated 5.7%.

Yesterday, David Leonhardt (the New York Times’ best financial writer – you would be well advised to read any article with his byline) had
a good article on the effect of the Obama stimulus. Here is a bit of it:
Just look at the outside evaluations of the stimulus. Perhaps the best-known economic research firms are IHS Global Insight, Macroeconomic Advisers and Moody’s They all estimate that the bill has added 1.6 million to 1.8
million jobs so far and that its ultimate impact will be roughly 2.5 million jobs. The
Congressional Budget Office, an independent agency, considers these estimates to be conservative.

The reasons for the stimulus’s
middling popularity aren’t a mystery. The unemployment rate remains near 10 percent, and many families are struggling.
Saying that things could have been even worse doesn’t exactly inspire. Liberals
don’t like the stimulus because they wish it were bigger. Republicans don’t like
it because it’s a Democratic program. …

Of course, no one can be certain about what would have happened in an alternate universe without a $787 billion stimulus. But there are two main reasons to think the hard-core skeptics are misguided — above and beyond those complicated, independent economic analyses.

The first is the basic narrative that the data offer. Pick just about any area of the economy and you come across the stimulus bill’s footprints.

In the early months of last year, spending by state and local governments was falling rapidly, as was tax revenue. In the spring, tax revenue continued to drop, yet spending jumped — during the very time when state and local officials were finding out roughly how much stimulus money they would be receiving. This is the money that has kept teachers, police officers, health care workers and firefighters employed.
Then there is corporate spending. It surged in the final months of last year.
Mark Zandi of (who has advised the McCain campaign and Congressional Democrats) says that the Dec. 31 expiration of a tax credit for corporate investment, which was part of the stimulus, is a big reason.

The story isn’t quite as clear-cut with consumer spending, as skeptics note. Its sharp plunge stopped before President Obama signed the stimulus into law exactly one year ago. But the billions of dollars in tax cuts, food stamps and jobless benefits in the stimulus have still made a difference. Since February, aggregate wages and salaries have fallen, while consumer spending has risen. The difference between the two — some $100 billion — has essentially come from stimulus checks.

The second argument in the bill’s favor is the history of financial crises. They have wreaked terrible damage on economies. Indeed, the damage tended to be even worse than what we have suffered.

Around the world over the last century, the typical financial crisis caused the jobless rate to rise for almost five years, according to work by the economists Carmen Reinhart and Kenneth Rogoff. On that timeline, our rate would still be rising in early 2012. Even that may be optimistic, given that the recent crisis was so bad. As Ben Bernanke, Henry Paulson (Republicans both) and many others warned in 2008, this recession had the potential to become a depression.

Yet the jobless rate is now expected to begin falling consistently by the end of this year.

For that, the stimulus package, flaws and all, deserves a big heaping of credit. “It prevented things from getting much worse than they otherwise would have been,” Nariman Behravesh, Global Insight’s chief economist, says. “I think everyone would have to acknowledge that’s a good thing.”

The article quotes HIS Global Insight, Macroeconomic Advisors and Moody’s The three forecasting firms represented are fully in the mainstream; the individual forecasters are regularly polled in the WSJ survey, among others. They each provide a counterfactual – comparing the likely course of GDP and employment with and without stimulus. Here is a graph from November that is still relevant:

[click on image to enlarge]

Leonhardt also quotes Mark Zandi, a
former economic advisor to John McCain’s presidential campaign. Here he is on the effect of the stimulus:

I think stimulus was key to the 4th quarter. It was really critical to business fixed investment because there was a tax bonus depreciation in the stimulus that expired in December and juiced up fixed investment. And also, it was very critical to housing and residential investment because of the housing tax credit. And the decline in government spending would have been measurably greater without the money from the stimulus. So the stimulus was very, very important in the 4th quarter.

Here’s an earlier comment from Zandi:

… “there was a considerable amount of hand-wringing that [the stimulus] was too small, and I sympathized with that argument,” said Mark Zandi, … Even so, “the
stimulus is doing what it was supposed to do — it is contributing to ending the
recession,” he added, citing the economy’s third-quarter expansion by a 3.5
percent seasonally adjusted annual rate. “In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus.”

“The economy has shed some three million jobs over the past year, but it would
have lost closer to five million without stimulus. The economy is still struggling, but it would have been much worse without stimulus.”
Of course, Congressional Republicans continue to defend their obstructionism. House minority whip, Eric Cantor – their go-to guy on the economy – is claiming that the ARRA has been an “
utter failure” … while at the same time taking credit for the jobs it is creating in his district:

Mr. Obama also borrowed a line from Congressional Democrats, who have been criticizing Republicans like Mr. Cantor for voting against the measure but then rushing back home to scoop up stimulus dollars for projects in their districts.

Under the headline “Eric Cantor Is a Hypocrite,” the Democratic National Committee on Wednesday issued a news release about how Mr. Cantor supported a high-speed rail project financed by the stimulus bill, saying it would create 185,000 Virginia jobs.

Mr. Obama put it this way: “There are those, let’s face it, across the aisle who have tried to score political points by attacking what we did — even as many of them show up at ribbon-cutting ceremonies for projects in their districts.”
Cantor is not alone. The Center for American Progress has a
report showing at least 111 Republicans who voted against the stimulus bill but have since taken credit with their constituents for its successes.

I guess the jobs created by the ARRA are only real if they are in the district of a Congressional Republican.

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