I think David Gregory is one of the smarter public-affairs show hosts around, but his exchange this morning with Larry Summers over the impact of the stimulus was extremely frustrating. Gregory was simply unwilling or unable to see that the point of the stimulus was to boost employment relative to where it would have been without the stimulus. So if the administration promised to save or create 3-4 million new jobs, and we ended up losing several million more jobs than anyone expected back when the stimulus was enacted, then obviously the overall unemployment rate is going to be higher than anticipated even with the stimulus. But that doesn't mean the stimulus didn't work.* And it certainly doesn't mean we should repeal portions of it, as Gregory periodically suggested. It just means we were operating from a different baseline than anyone realized at the time. (And, if anything, it means we should be talking about adding more stimulus, not repealing portions of it.)
Think about it this way: Suppose you're a cotton farmer and the government says it will give you a flat $5,000 subsidy this year, and that at the time the policy is announced, you expect to sell 10,000 bushels of cotton worth $5 a piece, generating $55,000 in income. (I'm pretty much pulling these numbers out of the air.) If you only end up selling 8,000 bushels at $5 a piece, netting you $45,000 with the subsidy, did the subsidy not have its desired effect? Of course it did, it just came on top of a lower level of income than anticipated.
Anyway, here's a truncated version the exchange if you're interested. Summers tried repeatedly to get this point across, to little effect:
MR. GREGORY: The criticism of this administration is that it has misread the impact of the stimulus on the economy, and here are the raw numbers when it comes to the unemployment rate. As of February 17th of 2009, the day that the stimulus plan was signed, unemployment was at 7.6 percent, it's now at 9.5 percent. Experts like yourself believe it's going to go up over 10 percent. Roughly two million jobs have been lost since the stimulus came on line, after this administration said in a report that if you pass a stimulus plan, we'll hold unemployment steady at 8 percent. What went wrong?
DR. SUMMERS: David, I, I think that's really very, with great respect, I think that's really a very misleading way of putting it. The administration's report was very clear that the stimulus would build over time, that less than 10 percent of the job creation would take place during 2009, that the largest impacts would be felt as the program took effect, as all of those projects got started. So we forecast that there would be a meaningful impact felt right away, but that that effect would increase very substantially. ...and that's what's happened. Now, it's true that unemployment is higher. It's higher than almost anyone forecast at the beginning of the year; and it's higher because, frankly, what we inherited was much worse. Most of the surprise increase had already taken place by March, and you can hardly hold the administration accountable for that. It turned out that businesses were even more scared than we realized; and, therefore, relative to past recessions, as demand for their products declined, they were much quicker to lay people off than they, than they have been. And so there was a surprise in the employment statistics, but that didn't have to do with the impact of the stimulus. That had to do with the baseline that we were dealing with. You saw that. You see evidence for that also, David, in this last economic report. In addition to giving us the data for the second quarter, which is what everybody's talked about, the negative 1 percent, it also gave us data on revisions of the whole history of GDP. And what those revisions showed us is that last winter the economy was much weaker than we thought it was at the time. ...
MR. GREGORY: But, Dr. Summers, wait a minute. You say it was misleading to bring up the 8 percent. The reality is that you wanted near-term economic impact from the stimulus. You gave a speech within the last two weeks during which you said unemployment is a real problem, that it was a surprise. My question is if you didn't get the near-term economic benefit that you wanted, you were surprised by that, does it have an impact on whether or not the president would consider repealing any of the long-term spending, given the deficit problem?
DR. SUMMERS: The president is very focused and will come to this, I hope, on the long-term deficit problem; but he is very committed to carrying through on the Recovery and Reinvestment Act, which is really a program over the next two years. Let me say, let me say it again, because this is an important point for your viewers, the economy surprised on the downside. We didn't know how bad it was last winter. That's what we've learned from the data revision. Because we didn't know how bad it was, unemployment is high. That does not speak to the efficacy, the extra impact that we've gotten from the administration's program. That's right on track. ...
MR. GREGORY: So you stand by your claim that this stimulus act will create three to four million jobs when it's all said and done.
DR. SUMMERS: This stimulus, this stimulus program will create more jobs. We were always very careful, very, very careful to say we'll save or create. What that was intended to say very clearly is relative to what would have taken place in its absence. We recognize nobody can know where the economy is going to be with any precision, but what we can know is that if we prevent cops and teachers from being laid off, if we enable consumers to spend more, if we put people to work investing in weatherizing 75 percent of federal buildings, then more people are going to be working than if we don't do any of those, any of those things.
MR. GREGORY: So you can't predict those three to four million jobs.
DR. SUMMERS: No. We can predict that there will be three to four million more jobs than there otherwise would've been, but we can't predict what the baseline is with great precision. We were always clear in saying that.
MR. GREGORY: I--you bring up near-term economic interests. This is a big, a big factor, and I want to get to that in just a minute. But, actually, I don't want to let one point go, which is this long-term spending picture, the investment part of the stimulus plan, which the president and you have said "very, very important." I just want to go back to that point. If the near-term impact is not as great, do you consider repealing any of the longer-term spending given the deficit problem?
*Of course, it's possible both that the baseline was far lower than we realized and that the stimulus didn't have its desired effect--i.e., that it didn't raise unemployment by 3-4 million even relative to the lower baseline. But that wasn't the claim Gregory was making.
Sunday, August 2, 2009
(MIs)Understanding Economic Stimulus
Far too many people fail to understand the logic behind proposals to improve the economy through stimulus spending. Noam Scheiber provided an example of this on his blog, The Stash: The ideas, politics, and personalities behind the battle to fix our economy, in his August 2, 2009 entry "`Meet the Press´ Frustrations":