Tuesday, July 12, 2011

Did the stimulus work?

David Weigel of Slate asks if the stimulus failed. His answer is no but his reasoning needs further scrutiny. He starts by quoting an estimate that jobs created by the stimulus cost $278,000 each then follows up with:

The analysis that the Weekly Standard tore apart found that the stimulus increased employment by about 400,000 jobs in the first quarter after it went into effect, and increased it by about 2.7 million at its peak. If you're deriding the price tag for those jobs, you're acknowledging that the jobs exist.

He does admit that the bill was oversold but excuses that:

At his most optimistic, he (President Obama) said the stimulus would be a success if it "created or saved" 4 million jobs. It fell far short of that. But ambitious, expensive bills have fallen short before, and it hasn't discredited their reasons to exist. George W. Bush's tax cuts were supposed to balance the budget by 2010. That hasn't happened, obviously, but tax cuts have not been discredited—in fact, they're central to the discussion about how to dig out of the recession now.

This is an interesting piece of logic. Yes, Bush's budget projections said that the budget would be balanced by now which did not happen but tax cuts were only a small part of the reason. No one projected the economic disruption caused by 9/11, two wars, and a housing boom. Taking a longer view, tax cuts have produced results in the past but stimulus packages never have. The Obama Administration promised that this time would be different. The question here is not if the Bush tax cuts worked. The only question is if the Obama stimulus worked.

Weigel insists that it did and insists that the real problem was getting the message out.

So, did it work? At $278,000/job, or even the lower estimate of $180,000/job then you have to accept that only a fraction of the money spent went to jobs. Can a program that wasted most of its money be considered a success?

But this still ignores the main point. The stimulus was supposed to stimulate the economy. Did it do that? Considering current unemployment figures, it did a terrible job of that.

The dirty little secret of the stimulus is that it was never expected to do much. The White House's projections showed that the recession would end on its own in the Summer of 2009 followed by a steep recovery. The expectation was that things would start getting noticeably better right about the time that the stimulus really kicked in.

The stimulus was roughly divided into three parts. It had a short-term bail-out for cash-strapped states and cities to tide them over until the economy recovered, it had a small tax break for lower-earners. The rest was pork barrel projects. The "shovel ready projects" were never more than a small part and, as the President now admits, never existed.

The real question is why we are even having this conversation? The recession did end on schedule (which means that the stimulus did not save us from a depression) but the recovery has been exceedingly weak. Obviously the stimulus accomplished very little.

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