I've Heard Enough, Thanks

One of the sillier assertions we see in the news and by Republican politicians these days is why they think the stimulus isn't working. Here's a sample from House Minority Whip Eric Cantor (VA-07), as quoted by The Hill:

The economic stimulus package was an “utter failure,” Cantor told reporters at the event, adding: “If we would instead focus half the stimulus dollars toward small businesses, I believe we would have seen many more jobs created than were created thus far.”

Rep. Eric Cantor Talks Jobs In Virginia

Never mind for a moment that Cantor insisted at the time that any stimulus money would have to be in the form of tax cuts to please him. Let's just look at this statement - the bill is an "utter failure", because, in Cantor's estimation, fewer jobs were created than could have been.

There's probably truth in that, but the main way that it could have created more jobs was by saving more jobs - the portion of the stimulus package that went to the states was nowhere near enough to stave off serious cuts in state and local spending. Yet this was one of the many things the GOP objected to. Moreover, while some Republicans criticized the paltry amount of money intended for infrastructure improvements, they didn't put their votes where their mouths were on that issue, either.

In the end, the stimulus was far smaller than it needed to be to reverse the economic decline. It was too small at least partly due to the Obama Administration's attempts to cater to both Republican and conservative Democratic congresspeople.

So, it was interesting to discover this New York Times graphic today:


What it shows is the opinion of three different financial companies of how the economy behaved this year and how it will behave in the next, with and without the stimulus that was passed:

“It was worth doing — it’s made a difference,” said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass.

Mr. Gault added: “I don’t think it’s right to look at it by saying, ‘Well, the economy is still doing extremely badly, therefore the stimulus didn’t work.’ I’m afraid the answer is, yes, we did badly but we would have done even worse without the stimulus.”

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the “jobless recovery” under way as wary employers hold off on new hiring.

New Consensus Sees Stimulus Package as Worthy Step

The success or failure of any economic program has to be judged on the basis of what would have happened without it, or with alternatives. These charts clearly indicate that things would have been worse without the stimulus bill. Whether it would have been better had the stimulus bill been all tax cuts as Rep. Cantor and his posse believe might best be answered by this conservative economist:

While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy.

“There should have been more direct federal spending that would have added to aggregate demand,” he said. “Temporary tax cuts and one-time transfers to seniors were largely saved and didn’t stimulate spending.”

Even the $787 billion price tag overstates the plan’s stimulus value given changes made in Congress, economists say. Nearly a tenth of the package, $70 billion, comes from a provision adjusting the alternative minimum tax so it does not hit middle-income taxpayers this year. That routine fix, which would do nothing to stimulate the economy, was added in part to seek Republican votes.

New Consensus Sees Stimulus Package as Worthy Step

I think we've heard enough from the gentleman from Virginia on the economy, and his party.

So what do real economists think about the stimulus? Here's one more quote from that NYT article:

Among Democrats in the White House and Congress, “there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument,” said Mark Zandi, chief economist of Moody’s Economy.com and an occasional adviser to lawmakers.

Even so, “the stimulus is doing what it was supposed to do — it is contributing to ending the recession,” he added, citing the economy’s third-quarter expansion by a 3.5 percent seasonally adjusted annual rate. “In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus.”

New Consensus Sees Stimulus Package as Worthy Step

Economist Dean Baker observes:

Even if we assume that we are starting from zero spending at the moment, this is boost of just over 0.5 percent of GDP. By contrast, the collapse of housing construction trimmed $450 billion or 3.0 percentage points of GDP from annual demand. The decline in consumption due to the loss of bubble wealth is in the range of $600 billion to $800 billion a year.

In other words, the remaining stimulus is an order of magnitude too small to give much of a boost to the economy. Economists who know arithmetic would be aware of this fact.

The Timing of the Stimulus' Impact

Politicians who knew math would, too, I suppose. In an economy as large as ours, such a small stimulus was bound to have a relatively small effect. That's particularly true when some of the stimulus money, particularly the tax cuts, was more likely to go into savings than back into the economy.

UPDATE (Nov. 26): Fixed the link in the last article quote. It had originally pointed to the next (or previous) article on that site.