Saturday, September 3, 2011

On the Efficacy of the Obama Stimulus

The chart at left represents the best non-partisan estimates of the impact of the Obama Stimulus (more formally the American Recovery and Reinvestment Act or ARRA) plan on the economy, based on data from the non-partisan Congressional Budget Office. The CBO has undertaken a series of studies of the stimulus package and continually updates their findings.

For 2012, the "CBO estimates that, compared with what would have occurred otherwise, ARRA will raise real GDP in 2012 by between 0.3 percent and 0.8 percent and will increase the number of people employed in 2012 by between 0.4 million and 1.1 million."

Here is a summary graph of the CBO's findings:

The CBO analysis enjoys broad support from numerous economists that have studied the issue. Ezra Klein summarizes nine studies on the issue: six find that the stimulus was successful, and only two find it unsuccessful. Thus, the problem with the stimulus is that it was too small.

Of course, because we are dealing with counterfactuals here we will never achieve 100% proof that the stimulus saved us from a deep depression in 2009-2011. But that conclusion is clearly supported by the best evidence to date, as well as longstanding macroeconomic science.

It is also noteworthy, that once debt deflation takes hold and people begin to hoard cash rather than invest in growth, only massive fiscal stimulus (shock and awe) like World War II can shake the economy out of its doldrums.


  1. When the Obama administration releases a report on the Friday before a long weekend, it’s clearly not trying to draw attention to the report’s contents. Sure enough, the “Seventh Quarterly Report” on the economic impact of the “stimulus,” released on Friday, July 1, provides further evidence that President Obama’s economic “stimulus” did very little, if anything, to stimulate the economy, and a whole lot to stimulate the debt.

    The report was written by the White House’s Council of Economic Advisors, a group of three economists who were all handpicked by Obama, and it chronicles the alleged success of the “stimulus” in adding or saving jobs. The council reports that, using “mainstream estimates of economic multipliers for the effects of fiscal stimulus” (which it describes as a “natural way to estimate the effects of” the legislation), the “stimulus” has added or saved just under 2.4 million jobs — whether private or public — at a cost (to date) of $666 billion. That’s a cost to taxpayers of $278,000 per job.

    In other words, the government could simply have cut a $100,000 check to everyone whose employment was allegedly made possible by the “stimulus,” and taxpayers would have come out $427 billion ahead.

    Furthermore, the council reports that, as of two quarters ago, the “stimulus” had added or saved just under 2.7 million jobs — or 288,000 more than it has now. In other words, over the past six months, the economy would have added or saved more jobs without the “stimulus” than it has with it. In comparison to how things would otherwise have been, the “stimulus” has been working in reverse over the past six months, causing the economy to shed jobs.

    Weekly Standard

  2. Did Obama's "stimulus" save us from another Great Depression? No.

    It has become a common refrain at the White House and among administration supporters that President Obama's aggressive efforts to stimulate growth prevented an economic catastrophe.

    IBD reviewed records of economic forecasts made just before Obama signed the stimulus bill into law, as well as economic data and monthly stimulus spending data from around that time, and reviews of the stimulus bill itself ...

    White House economists forecast in January 2009 that, even without a stimulus, unemployment would top out at just 8.8% — well below the 10.8% peak during the 1981-82 recession, and nowhere near Depression-era unemployment levels.
    The same month, the Congressional Budget Office predicted that, absent any stimulus, the recession would end in "the second half of 2009." The recession officially ended in June 2009, suggesting that the stimulus did not have anything to do with it.

    The argument is often made that the recession turned out to be far worse than anyone knew at the time. But various indicators show that the economy had pretty much hit bottom at the end of 2008 — a month before President Obama took office. Monthly GDP, for example, stopped free-falling in December 2008, long before the stimulus kicked in, according to the National Bureau of Economic Research. Monthly job losses bottomed out in early 2009 while the Index of Leading Economic Indicators started to rise in April.

    Other programs Obama often touts — Cash for Clunkers, mortgage help, homebuyer tax credits, the auto rescue plans — either came as the recession had ended or was ending or were widely deemed to be busts.

    ... often overlooked is that a tremendous amount of stimulus already was in the economy when Obama took office, including President Bush's $150 billion stimulus, two unemployment benefit extensions and $250 billion spent on "automatic stabilizers."

    More importantly, the Bush administration pushed through the controversial $700 billion TARP program (which Obama sustained), while the Fed pursued an aggressive anti-recession campaign by, among other things, effectively lowering its target interest rate to zero ...

    Princeton economist Alan Blinder and Moody's Analytics chief economist Mark Zandi studied the relative contribution of Obama's $830 billion stimulus compared with TARP and the Fed's "financial-market policies."

    While the economists credit Obama's stimulus for helping end the recession when it did and keeping unemployment lower than it would have been, they concluded that TARP and the Fed's actions were "substantially more effective" at saving the economy from ruin.


  3. Economists Timothy Conley and Bill Dupor have studied the effects of the American Recovery and Reinvestment Act (the purported stimulus bill) with great rigor. Earlier this week, they reported their findings in a paper titled “The American Recovery and Reinvestment Act: Public Sector Jobs Saved, Private Sector Jobs Forestalled.” The study concludes, Our benchmark results suggest that the ARRA created/saved approximately 450 thousand state and local government jobs and destroyed/forestalled roughly one million private sector jobs.

    A trillion dollars to destroy 1 million private sector jobs‏

  4. White House economists used forecasting models that assumed each dollar of spending would trigger between $1.50 and $2.50 of growth. As a result, President Barack Obama announced that his plan would grow the economy by more than 3 percent and “create or save” 3.5 million jobs over the next two years, mostly in the private sector. These models also forecasted that without the spending, the unemployment rate would increase from 7 percent to 8.8 percent.

    Since then the U.S. economy has shed another 2.5 million jobs and the unemployment rate has climbed to 9.6 percent.

    The stimulus isn’t working because it is based on faulty economics. Using historical spending data, the Harvard economist Robert Barro and recent Harvard graduate Charles Redlick have shown that in the best case scenario, a dollar of government spending produces much less than a dollar in economic growth—between 40 and 70 cents. They also found that if the government spends $1 and raises taxes to pay for it, the economy will shrink by $1.10. In other words, greater spending financed by tax increases hurts the economy. Even if the tax is applied in the future, taxpayers today adjust their consumption and business owners refrain from hiring based on the expectation of future tax increases, which worsen the economy today.


  5. "... only massive fiscal stimulus (shock and awe) like World War II can shake the economy out of its doldrums."


    Will the goods and services in the Democrats' stimulus plan—be they concrete for new highway projects or groceries for hungry families—pump up flagging demand and boost stalled economic activity?

    If so, it will be the first time in recorded history.

    Take the New Deal. According to the economists Christina Romer, chair of Mr. Obama's Council of Economic Advisers, and David Romer, New Deal spending did not pull the economy out of recession. In a 1992 Journal of Economic History paper, the Romers examined the role that aggregate demand stimulus played in ending the Great Depression. They concluded: "A simple calculation indicates that nearly all of the observed recovery of the U.S. economy prior to 1942 was due to monetary expansion. Huge gold inflows in the mid- and late-1930s swelled the U.S. money stock and appear to have stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods."

    Even the massive spending during World War II, long touted for pulling America out of the Depression, didn't necessarily help. In a 2006 paper for the National Bureau of Economic Research, economists Joseph Cullen and Price V. Fisher asked whether the local economies that were the biggest beneficiaries of federal spending on military mobilization during World War II experienced more rapid growth in consumer economic activity than others. Their finding: Military spending had virtually no effect on consumption.

    Another economist, Robert Higgs, offered an even more thoroughgoing critique in an excellent 1992 Journal of Economic History paper. After challenging the conventional portrayal of economic performance during the 1940s, Higgs concluded that "the war itself did not get the economy out of the Depression. The economy produced neither a 'carnival of consumption' nor an investment boom, however successfully it overwhelmed the nation's enemies with bombs, shells, and bullets." Breaking windows in France and Germany didn't bring prosperity in America.

    In his 2008 book Macroeconomics: A Modern Approach, Harvard economist Robert Barro shows that $1 of government spending in wartime produces less than $1 in GDP—80 cents, to be exact. Stanford economist Bob Hall and Sand Hill Econometrics chief Susan Woodward, neither particularly pro-market, argued recently that each dollar of government spending during World War II and the Korean War produced about $1 of GDP. In other words, the economy is not stimulated by war spending.


    You are an ideologue and your discredited ideology will lead us to a global depression. Try thinking instead of reverting to obsolete doctrines of defunct economists.

  6. This recession might well have been a deep one even with good government policies, but "government failure" added greatly to its length and severity, including its continuation to the present. In the U.S., these government actions include an almost $1 trillion in federal spending that was supposed to stimulate the economy. Leading government economists, backed up by essentially no evidence, argued that this spending would stimulate the economy by enough to reduce unemployment rates to under 8%.

    Such predictions have been so far off the mark as to be embarrassing. Although definitive studies are not yet available about the stimulus package's overall effects on the American economy, most everyone agrees that it was badly designed and executed. What the stimulus did produce is a sizable expansion of the federal deficit and debt ...

    ... Although regulatory discretion failed leading up to the crisis, Congress nevertheless added to the number and diversity of federal regulations as well as to the discretion of regulators. These laws and the continuing calls for additional regulations and taxes have broadened the uncertainty about the economic environment facing businesses and consumers. This uncertainty decreased the incentives to invest in long-lived producer and consumer goods. Particularly discouraged was the creation of small businesses, which are a major source of new hires.

    The expansion of government resulting from the stimulus and other government programs contributed to rising deficits and growing public debt just when the U.S. faced the prospect of big increases in future debt due to built-in commitments to raise government spending on entitlements. Social Security, Medicaid and Medicare already account for about 40% of total federal government spending, and this share will grow rapidly during the next couple of decades unless major reforms are adopted ...

    The lesson is that it is crucial to consider whether government regulations and laws are likely to improve rather than worsen the performance of private markets. In an article "Competition and Democracy" published more than 50 years ago, I said "monopoly and other imperfections are at least as important, and perhaps substantially more so, in the political sector as in the marketplace. . . . Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market."

    The widespread demand after the financial crisis for radical modifications to capitalism typically paid little attention to whether in fact proposed government substitutes would do better, rather than worse, than markets.

    - Gary S. Becker, the 1992 Nobel economics laureate, is professor of economics at the University of Chicago


  7. If you look at the difference in GDP from the non-partisan CBO it amounts to $754 billion give or take. That means the stimulus was socially costless. We gained millions of jobs for free. Without the stimulus we suffer deadweight losses to GDP. The stimulus paid for itself. Even from a tax point of view it generated massive revenues and contributed very little to the deficit. (Although it did contribute, as I posted previously.) Not my numbers--the non-partisan CBO study shows the difference in GDP.

    The stimulus had problems--as I argued from the beginning. But, the problem is not that fiscal policy never works.