“Economists say the stimulus worked.”
That’s one of the claims I heard over the Thanksgiving holiday, and it was thrown out in the middle of a completely different conversation, so I didn’t challenge the claim at the time. But last week as part of President Obama’s opening offer on avoiding the fiscal cliff, Treasury Secretary “Turbo Tax” Timothy Geithner asked for an additional stimulus spending of $50 billion that Obama pointedly didn’t campaign on. So, did the first stimulus work?
I’ll start by pointing out that it’s really hard not to “create jobs” when spending $1 trillion. I’m reminded of the film “Brewster’s Millions” starring Richard Pryor and John Candy. From the IMDB synopsis:
Brewster is a minor league baseball player. Unknown to him, he had a (recently deceased) rich relative. In order to test if Brewster knows the value of money, he is given the task of disposing of $30m in 30 days. Brewster isn't allowed to have any assets to show for the $30m or waste the money in any way. If successful, Brewster gets to inherit $300m. The biggest problem of all however, is that Brewster can't tell anyone what he's doing, so everyone thinks he's crazy.
So, how does Brewster go about wasting a lot of money while having nothing to show for it? One of the main methods he uses is to hire a lot of hangers-on. He hires multiple security guards. He rents a penthouse. He hires interior designers and remodelers (while renting the furniture). He funds crazy schemes. He tries to blow money gambling.
If there’s one thing you learn from that movie, it’s that it is very hard to spend a large sum of money and have nothing to show for it.
So, if Obama’s stimulus is merely judged to have “worked” if it “created” jobs, then certainly it worked. But that is an incredibly low bar and not one we should casually accept when it’s hard-earned tax dollars funding them. Do you really want to say something “worked” when you spent $250,000 to create one job that actually paid $50,000 and lasted only one year? Only the government can make those sorts of “investments” and still operate as a functioning concern.
Everyone except flacks for the White House knows that the 2009 stimulus package failed miserably to produce the promised results. But even if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.
Government stimulus generally, and Obama’s stimulus specifically, is little more than Bastiat’s “Broken Window Fallacy” writ large. The government takes money via taxes (or borrowing, which will be paid back in future taxes) from individuals and the bureaucracy directs its spending in ways that people spending their own money would not. This can create a supply of products for which there is little demand (see Volt, Chevy and solar panels, Solyndra, etc.) and leave the beneficiaries of government largesse to cut economically unnecessary jobs later, if they aren’t bankrupt already. New York Times columnist/hack and Nobel Prize-winning economist has embraced this idea, even calling for the government to fake an alien invasion scenario so that trillions could be spent defending the world from it (who’s the warmonger now?).
You’ll note that Krugman has apparently not spent any of his own money preparing for an “Independence Day” sequel. Apparently spending money irrationally is one of the things we do together.
I’m sure you’ve seen a version of this before:
This was the chart (minus the red “Actual Unemployment Rate” dots) prepared by Obama economic advisers and stimulus supporters Jared Bernstein and Christina Romer. As the “fact checkers”/”dishonest opinion journalists” like to point out, Obama never specifically promised that the above would happen. He left it to his minions to peddle the line that passing the $1 trillion stimulus would keep the unemployment rate below 8 percent. And, without the recovery plan, it would hit 9 percent.
Above you see what really happened.
Question: If this is the stimulus “working,” what would it look like if it had failed? When presented with this prediction and the subsequent reality, stimulus supporters say that they were wrong; without the stimulus unemployment might have reached 15 or 16 percent! It worked better than we ever imagined!
If you look at the logic of their claims, they are simply not falsifiable. The stimulus worked and because reality didn’t match our model, the model was wrong in predicting the severity of the recession, not the effectiveness of the stimulus.
So, “economists say the stimulus worked,” but did they really say that? That’s the headline you got from some journalists (notably E.J. Dionne), but the economists judgments weren’t so unequivocal.
On February 15, they put two statements to the panel and asked them to respond. The first statement reads:
Because of the American Recovery and Reinvestment Act of 2009, the U.S. unemployment rate was lower at the end of 2010 than it would have been without the stimulus bill.
It is true that, of those surveyed, 51 percent agreed and 29 percent strongly agreed with this statement. Some of the comments from those who agreed with this statement are telling. Anil Kashyap of Chicago for example wrote, “But this is an incredibly low bar.” And Darrell Duffie of Stanford wrote, “Subsidizing employment leads employment to go up, other things equal. Adverse impacts through growth incentives might take time.” These statements (and others) suggest that perhaps the question was overly-narrow.
As I noted again, this is “Brewster’s Millions.” If you spend $1 trillion, you’re going to create economic activity. The key question is the next one:
They asked the economists to weigh in on a second statement:
Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs.
This time, when the economists were asked about the longer-run, total effects of stimulus, they were much more equivocal. Less than half agreed or strongly agreed with the statement, 27 percent were uncerta
in, and the rest either disagreed or had no opinion. A number of respondents noted the uncertainties involved. Nancy Stokey of Chicago summed it up nicely, writing, “How can anyone imagine this question is answerable, given the current state of economic science?”
Much of this depends on the belief that government spending has a positive multiplier on the economy. That’s the basis for the laughable claim that $1 spent on unemployment insurance turns into $1.67 in economic activity. If the multiplier’s that big (and the assumption that the multiplier of a dollar earned actually working a job would be lower), then the way to get the economy going is to put everyone on unemployment.
Here’s a chart of recent studies attempting to calculate the government “spending multiplier.”
I think Russ Roberts put the issue in the clearest possible terms over at Café Hayek:
Step back for a minute and consider the challenge of measuring the impact of the stimulus. It is one of many things that happened between February 2009 and the end of 2010. For starters, massive reforms of health care and the financial sector were passed. They were passed but the details of how they would actually be implemented remained uncertain through the end of 2010 (and remain so today.) There was an unprecedented set of monetary interventions. From the end of 2008 through the end of 2009, the Federal Reserve’s balance sheet went from around $800 billion to about $2.2 trillion. And of course a million other things happened as well. The price of housing fell steadily during this period, the price of oil rose steadily, the recession officially ended and on and on and on.
No one has a model of the independent impact of these different factors or a way of measuring them accurately and reliably in a way that can be tested and confirmed or rejected. No one. That means everyone, on the left or the right, who claims to have evidence for the impact of one of them or who cherry-picks one of those out of the myriad to choose from and blames that one factor for the lousy pace of the recovery is either fooling himself or fooling you. Don’t be a fool. So when the E.J. Dionnes of the world tell you that government creates jobs, just ask them how they know. Their answer will be that someone with exemplary credentials says so. But there are those with exemplary credentials who say otherwise. Where does that leave us? It should leave us in ignorance and doubt. No certainty. No exclamation points. More humility.
Again, I’ve little doubt that spending $1 trillion didn’t create some jobs and economic activity. But I’m skeptical that they were the jobs based upon intimate economic knowledge of specific markets and were the best method for easing the recession.
I think we’d all be better off if the government wasn’t spending huge sums of money at the direction of politicians and bureaucrats to create an economy that behaves as they think it should behave. The Soviets tried it for several decades, and that didn’t end well.
Perhaps Republicans’ (and the country’s) best hope is that Obama is doing all of this because he’s got a rich relative who can bail the U.S. out of the $16 trillion in debt the country owes.
Or maybe Obama just confused trillion with billion or million.