The Stimulus Spending Bill: Is It Working at All?

In the November 2, 2009 TIME magazine artilce "The Stimulus Spending Bill: Is It Working at All?," Justin Fox explains that much of the criticism of stimulus spending is misguided.

The $787 billion American Recovery and Reinvestment Act that Congress approved last February was the first major legislative accomplishment of the Obama White House. Lately, it has also become one of Washington's most frequently tossed political footballs.

Here's the play-by-play from a few days in mid-October. House Republicans wrote (and released to the public) a letter to the President in which they claimed that with the unemployment rate at 9.8%, "it is now evident that the massive 'stimulus' spending bill enacted months ago has been unsuccessful." Obama economic adviser Larry Summers stepped up to play defense. "Thanks largely to the Recovery Act ...," he wrote, "we have walked a substantial distance back from the economic abyss and are on the path toward economic recovery."

The next counter came in a memo to House Republicans from economist and former John McCain adviser Douglas Holtz-Eakin, who wrote, "Jobs keep disappearing ... and the Obama Administration's only apparent plan is to double down on a failed strategy for economic stimulus." The next day, the White House went on offense, hailing a preliminary report on stimulus job creation (30,000 jobs directly created or saved by the first $16 billion in spending). House minority leader John Boehner retorted that such exulting was "beyond the pale" because "3 million private-sector jobs have been lost since it became law."

Who's right here? Well, first, the Republican argument that the stimulus is a bust because jobs have been lost fails a basic logic test. After last fall's global financial shock, the job market was going to be thrown for a loss no matter what. The issue is whether the number of job losses is greater or lesser than it would have been in the absence of the stimulus. "You can't answer these questions without a compared-to-what," says Jared Bernstein, economic adviser to Vice President Joe Biden, who is overseeing the stimulus. "We can have good arguments about the baseline, but a critique that doesn't evoke the baseline is useless."

I got my rough baseline from a conversation at the height of last fall's financial panic with Barry Eichengreen, an economist at the University of California, Berkeley, who is an expert on the Great Depression. "I doubt that we'll be able to avoid double-digit unemployment," he told me. "But I'm still confident we can avoid 24% unemployment like in 1933."

By that standard, we're doing O.K. But Bernstein and Christina Romer, the chairwoman of the President's Council of Economic Advisers, made the mistake of providing a more optimistic baseline last January — a forecast in which unemployment peaked at 9% without the stimulus bill and stayed below 8% with it.

Unemployment has of course passed both those mileposts and is probably still rising. ("I have noticed," Bernstein says dryly.) This overshoot says more about the inadequacy of economic-forecasting models than about the efficacy of the stimulus. But the White House cites these same kinds of models in claiming that the stimulus added between 2 and 3 percentage points to economic growth in the second quarter and 3 points in the third quarter. This may be correct as far as general direction — my unscientific assessment (a.k.a. guess) is that it is — but the exact numbers are probably bunk.

The political back-and-forth on the stimulus bill is the ultimate in bunk, though, because it ignores most of the fiscal stimulus provided by Washington so far. Anytime the Federal Government spends more than it takes in, it creates fiscal stimulus. That stimulus (deficit) was $1.4 trillion for the just-ended fiscal year, up about $1 trillion from the year before. The stimulus bill accounted for just $200 billion of that increase, according to the Congressional Budget Office. Bailing out banks and other financial firms cost $245 billion. A $419 billion drop in tax receipts (due mainly to recession, not legislation) without an offsetting spending cut was the biggest factor in the deficit's rise. Then there are the trillions of dollars the Federal Reserve put into asset purchases and other programs — surely the biggest stimulus of all.

Why don't we hear constant political debate about these other stimulus efforts? Presumably because they were the result of bipartisan legislation or were the doing of the nonpartisan Fed. That is to say, the Obama Administration can't take full credit for the bulk of the stimulus, and the Republicans can't disown it. So neither side talks much about it. Over the coming year these other forms of stimulus will — one hopes — be ratcheted back, while stimulus-bill spending will peak. At that point the great stimulus debate might actually start to matter. Until then, there's better football to be watched elsewhere.