Did the Stimulus Help?

By James Kwak

This could be a midsize political battle in the run0up to the midterm elections, as discussed by The New York Times. The positions on both sides are too obvious to warrant repeating. If I recall correctly, the Obama administration hurt itself by underestimating the course of future unemployment a year ago when it passed the stimulus (most people were making the same mistake at the time), so now if you compare actual unemployment against original projections it looks like the stimulus had no impact. But that was a forecasting error and has nothing in itself to do with the stimulus itself.

Menzie Chinn has an overview post on the debate in which he argues that, at least from the standpoint of economists, it’s hardly a debate: the stimulus worked.

He points out that leading private-sector economic consulting firms are crediting the stimulus with significant impacts on GDP growth and employment. Here’s the money chart (originally from the Times):

Chinn discusses the types of models used to generate those forecasts, and competing models used by a few academics that yielded different results. He also points out that the CBO also estimates significant growth and employment impacts. If you want to pursue the matter further, he links to a couple of contrary arguments.

Of course, none of this will matter in the end because, as someone (Barney Frank?) said, you can’t get elected saying things would have been even worse without you. Unemployment will still be high in November and the Republicans will blame it on Obama. Voters aren’t going to believe macroeconomic models, don’t realize that unemployment is a lagging indicator, and will (with a little justification) think that Obama could have done more to create jobs.

32 thoughts on “Did the Stimulus Help?

  1. I think that it is indisputable that it worked, but it was too little, too late initially. It should have been bigger and faster – it would probably have stalled the freefall much quicker. The big failure is the one Basline has pinted out many times before that no efective quid pro quo was extracted. A collosal wasted opportunity. The revelations since about individual bank behaviour shows just how many of the key players were asleep. The US however is not alone in this: it took an age for the UK to act and to stop obsessing about moral hazard. We all have to seize the chance now to change the system. Re-engineering the US economy is going to take a lot of cash. There is also increasing diveregence between national economic interest ( with respect to $ policy) and international requirements. The classic reserve currency bind. We have been here before in the UK and its chronic problems with overseas balances The $ does NOT have the same traction as in the deacdes following WWII, now we need to address this as the cost to the US of running this level of fiscal deficit is barely bearable, even for the US.

  2. Ah. Yes. Another trip to the punch bowl and I feel much better. Unfortunately I’m not going to be able to nurse my hangover by sleeping in tomorrow. The punch was bought on credit.

  3. Obama could have done more? He could have also done less. Government meddling does not inspire business confidence. Especially once all businesses get to pay the taxes for expenditures benefiting a few.

  4. Where did the money go? So far, most of it has gone to maintain the well-above-market salaries and benefits of public (Federal, State & Local) employees.

    The growth of the Tea Party is a direct, grass roots response to the growth of public employee compensation and the increasing power of unions like the SEIU. The Mass Senate race says it all; Obama ignores this phenomenon at his peril.

  5. Yes. It’s been a long time since I’ve seen an exception. They’re usually wrong by the letter of what they’re saying, and always by the spirit.

    “Growth”, “GDP” – their one and only “idea” is to reflate the bubble.

  6. Any stimulus helps provided it is paid for by taxes on the corporate rich. Otherwise it becomes simply an excuse to gut social security and medicare which is exactly what Pres O’Brother and his pals are now embarked upon in full throated outcry. Turn off the TV at night and you can hear the bleating. Soon we will be entertaining the IMF and be indistinguishable from Argentina (and Greece), except in the Right to Work States.

    Idiots get exactly what they deserve.

  7. The voters are angry at the Dems…but more angry at the Republicans. I think it’s going to be a race to see how many voters can stay at home.

  8. The Tea Party movement is a joke; a misdirection campaign at best.

    According to Webster’s a stimulus is “something that incites or rouses to action; an incentive:” This is exactly what Obama’s stimulus has done. It is never intended to be a long term solution for real economic and GDP growth. By giving money to people at who live closest to poverty (i.e. extending unemployment benefits) the money is assured to be spent. However, one third of the stimulus was directed at tax cuts for 95% of taxpayers. The jury is out on whether that money actually ended up stimulating the economy. I know in my case it when to strengthing my balance sheet which I imagine is where alot of other people directed it as well.

    I disagree with alot of the comments that government investment does not help businesses. Government investment accounts for over 70% of scientific research which has lead to many useful business application like the internet developed by DARPA for example. Private businesses have created many applied uses to ideas that were initially developed with government funding.

  9. Agree absolutely. And in the case of Menzie Chinn, he’s never seen an Obama policy he didn’t like. Why should this be any different?

  10. While the stimulus may have “helped” when only looking at the GDP numbers, the enormous cost clearly outweighed that of the benefit.

    In addition, the stimulus has done absolutely jack squat from a job producing standpoint, which was one of the emphasis Obama made as a means to ram it through Congress. If I remembered correctly, Obama had stated that without the stimulus, unemployment rates might hover up to 8%! Too bad with it, it is currently at 10%. WHOOPS!

    Lastly, the fact the stimulus is MIRED in pork doesn’t really give me any solace about why I should never trust government and their prodigious ways of spending. Never works and never will work.

  11. The whole notion of “tax cuts” as being part of the stimulus is at best a misnomer. If anything, a majority of these “tax cuts” are more in the realm of TAX CREDITS. It is no different from Bush II’s laughable stimulus checks of 2008 which really didn’t do squat for the economy.

  12. There were no earmarks in the stimulus bill. Also, the fact that they forecasted future unemployment rates incorrectly doesn’t mean that the we wouldn’t have 13% unemployment today without the stimulus bill.

  13. No earmarks? How do you explain (among SO many things) giving money to Duke U to send 10 students to Costa Rica? Or money to Ireland for Catholic/Protestant dialogue? Or $2.5MM to a Denver museum that already has $90MM in the bank? Or most notoriously, $6 million dollars to get a handful of people employed… all of which had connections to Hilary Clinton? How are a lot of these pragmatic in terms of creating a large scale work force?

    Also, the assertion about an even higher unemployment rate if it wasn’t for the “rescue” by the stimulus is eerily similar to Obama’s shameless cop out spin about how “we’re losing jobs at a slower rate” when long term jobs aren’t being efficiently created.

  14. Those are not earmarks. Those are stimulus projects. The $2.5 million to the Denver museum is going to help fund a brand new exhibit and a small room add on that should help recuperate most of that in ticket sales over the next year or so in addition to the workers needed to make the exhibit.

    An earmark is something that allocated from an existing allocated budget not new government spending as in the stimulus. About of one third of the bill is comprised of things like grants and loans to the NIH and the NSF to help fund new the study of new technologies. Duke got around 564,000 in these grants which went to over 50 programs, most of which fall in this category. The majority of scientific research is funded by the government, not private enterprise.

  15. C Smith – please… do tell about the above market salaries that public sector employees revel in. I’m assuming these are the exorbitant salaries that constitute a huge chunk of the wealth in this country… oh wait, that kind of money is relegated to ~ 1% of the entire population of America, the uber-rich, none of whom are in the public sector. What the F are you talking about?

    Wake up dude. The Tea Party is so blind that you actually believe the enemy is the money hoarding employees at your cities water filtration plant? Or the DMV employees who drive home in their mercedes benz to their gated community? It’s one thing to bring up class warfare, but to get it entirely backwards is laughable. It’s posts like this that make normal people roll their eyes at the apparent glaring ignorance of the Tea Party as a whole.

  16. Easy E – did you happen to look at the projected employment charts above? I’m guessing you did and at that point your eyes glazed over and you decided it was time to not actually absorb and retain information.

    If someone gives you $5 and you spend $10 then you’re down $5 instead of $15 – this doesn’t mean that $5 you received didn’t help you not be in a deeper hole. It’s so simple… Had the projections for unemployment been 10% instead of 8% I am curious to know what the naysayers would be saying – some other iteration of the knee jerk Conservative refrain, which during this administration seems to all have the subtext of, “Obama did it so it’s wrong and there’s no possible way it could work because it wasn’t what we wanted to do”.

    The reality is that GDP is growing and unemployment would have been much worse and there are PLENTY of sites tracking down to the county where this money is going – just because you don’t like the money being spent on a project you deem stupid doesn’t mean it’s not helping to provide a job for someone.

    And a blanket assetion that government spending doesn’t work and never has is ‘retarded’ on its face. I work for a global, publicly traded company of which half of it’s balance sheet comes from federal spending. I guess this isn’t working to provide everyone in this companies Federal segment jobs.

  17. Easy E – way to go pointing out that less than 1/1000th of the stimulus went to stuff that you think was a waste, therefore the whole $787 billion was all for not.

    If you have sets and sets of independent data telling you that the economy is indeed losing jobs at a dramatically lower rate than what it was doing, then most folks look at this as not just happening because of nothing. They tend to attribute it to something… something like a $787 billion dollar stimulus bill.

    Newsflash for you – about 30 years ago industrial jobs {the backbone of the middle class} started to dwindle in America and have been in a steady decline ever since – if this is to happen again, leading the way towards a long term goal of a green economy is the way to go… but we can’t get there because, I’m guessing, folks like yourself will fight tooth and nail against any initiative that tries to spur this wave on because it’s not simply ‘drill here, drill now’.

    There has been no long-term job creation in America since Reagan came into office and started us down the path of the boom/bust cycle of artificial inflation with reality checks 1-2 times every decade to remind us that uber-free-market policy sent too many jobs overseas for cheap labor.

  18. Mr. Kwak wrote: “Did the Stimulus Help?”

    February 18, 2010: 7:31 PM

    NEW YORK (CNNMoney.com) — ” Just as they are contending with massive gaps in their operating budgets, states and localities must also deal with a $1 trillion deficit in public employees’ retirement benefits’ funds, a new report found.

    The shortfall amounts to more than $8,800 for every household in the nation, according to the Pew Center on the States, which published its findings Thursday.”


  19. Weak comeback.

    First off, there are A LOT more areas I could have used (please note the terms “among many things”) as a means to show the futility of the “stimulus.” The things I mentioned were just brief line items that back up this claim. My guess is you probably skipped the lecture about RANDOM SAMPLING during your schooling days in Stats 101.

    Secondly, the notion of “losing jobs at a slower pace” is exactly I said it is. A weak cop out from the Obama administration who pushed this garbage through Congress with lukewarm results. There is NO WAY anyone can qualify the criteria as to what “saves” a job, much less calculate the amount that has been saved. If you read the stimulus bill closely, MANY of those jobs do not produce a solid or long term work force and the fact that it absolutely annihilates the deficit is not something Gen Ys like me are not too fond of.

    As for your assumption about my opposition of green energy, you’re wrong. I actually do advocate the progression of clean energy technology especially in the area of nuclear. Unfortunately, the concept of clean energy has been more so in the lines of pompous rhetoric than that of pragmatic execution as few significant development have arrived over the past few years. While China is absolutely blowing us away with their investment in clean energy, we’re still here lagging away drinking the “hope and change” kool aid.

  20. While there are a few bills that advocate the enhancement of technologies, they do NOT constitute 1/3 of the bill.

    Also, it’s a bit ironic, even comical, you talk about government helping the advancement of scientific research in a time when Obama is planning to cut back on programs like NASA while allocating more funds to the government handouts. Not to mention his draconian and anti business (cap+trade, card check, health care bill, etc.) ideology which would only hinder tech companies which are all but recession proof.

  21. The entire stimulus package should have been spent on infrastructure. We need a new power grid and high-speed rail in the densely populated corridors of the country.

  22. I’m very familiar with random sampling… for example, I randomly sampled 3 of your comments on here and can safely draw the conclusion that pretty much everything you think with regards to the economy falls into the same tired Conservative/uber-Free Market or else bucket. And what you did is not an illustration of random sampling because you did NOT pull these initiatives randomly out of the list of projects paid for by the stimulus bill. You went with preordained illustrations of, in yours and other like-minded folks, examples of government waste in action {representing 1/1000 of the bill}. Other posters on here have already pointed out the inherit dishonesty in the way in which you framed these projects as being wastes of money and all for naught when in reality they weren’t but that didn’t seem to register with you.

    And if by pompous rhetoric you mean actually calling for a shift in our energy policy and proposing a means in which to do so {cap and trade} versus ‘Drill, baby, Drill’ then I guess the pomposity {in your eyes} outweighs the actual initiative to try and tackle this problem – which I don’t understand.

    And what do you mean there’s no way to clearly infer what saved a job? If a state has a police force and the budget is short forcing job cuts and that same state then receives funds to plug that gap, then these jobs were saved by said funding.

    If this isn’t clear then I’m not sure how you {specifically} draw correlations to anything frankly…

  23. how is healthcare reform a hindrance on business? The goal of reform is to lower premiums, which businesses pay as well.

    And last time I checked, when unions were at their height of power we had a strong middle class and no boom/bust cycles… they ruined ‘Merica until the great Reagan came into office and did some union busting of his own which really set the country on the path to prosperity over these last 30 years {except every 5-7 years when bubbles burst and tons of private businesses all across America were negatively affected by the resulting economic downturns}

    There’s reality… and then there’s Conservatives take on reality. These are mutually exclusive.

  24. Interesting… when I use a select sample as a means of furthering my point, I am deemed to be a myopic conformist. Yet, when you opt for the same method of presumption, it’s automatically fair game. Splendid.

    Alright, if you enjoy making asinine preconceived notions, I can just as easily brand you to be a typical numerically inept hipster who hinge on anything and everything posted by Huffington Post or Daily KOs. However, I’m not going to jump to that conclusion… yet.

    And by pompous rhetoric, I DO mean pompous rhetoric. You did absolutely nothing in your post to state HOW the call for a shift in energy policy has led to PRAGMATIC (key word) execution in regards to clean energy. And dear God, please do not say Cap and Trade. The only thing Cap and Trade will do in this country (among many things) is jack up all sorts of energy bills and force even the most pro American companies offshore to India/ China which have almost zero environmental regulations. Saying cap and trade is an effective means of furthering clean energy would be like me asking you what is an example of an ethical company and you responding Enron.

    Another ironic thing you noted in your post is the state budget shortfall conundrum and how that constitutes saving a job (never mind the fact they are taking $$$ away from the private sector). If you haven’t heard, a lot of states are actually seeing a BIGGER deficit next year because 1. The original stimulus $$$ they got is gone 2. In accordance with the rules of the stimulus bill, they cannot fire workers that they can’t afford. And people wonder why so many states are becoming more and more insolvent. But hey, whos to say another $787 billion won’t solve the problem. It’s only money. LOL.

  25. If you believe the healthcare reform bill is a benevolent thing for businesses, then I really don’t know what to say.

    The fact you uphold this mindset probably puts you in the same circle of people who believe deregulation was the cause of the current financial crisis while conveniently ignoring the fact that 1. Federal spending increased more under GWB than any other president 2. Public companies registered under SEC are facing more and more regulation/ compliance based cost (i.e. SOX). So much companies don’t even want to go public anymore 3. A number of the current fiascoes were the direct results of (surprise, surprise) government interventions.

    I also thoroughly enjoyed your commentaries on how Unions are the champion of the middle class people when in reality, they phase out a lot of individuals and keep unemployment high. The fact many unions out have ties to criminal and other seedy organizations do not help your cause either.

  26. NASA is not being cut. The trip to the moon is being cut but other areas of funding are being increased. You need to quit getting your facts from Fox News and start doing a little fact checking from time to time.

    Cap-and-trade seems like a good program and carbon credits are the fastest growing traded commodity in Europe. I do agree with you that the program does have some wrinkles that do need to be worked out. Basically the carbon credit commodity that is traded is promise to cut emmissions. It doesn’t make much sense to me to put intrinsic value in a promise of that nature without any collateral, but I guess we have learned that the investment banks are comfortable trading in assets with no intrinsic value.

  27. In Mr. Kwaks article he did not take sides, except my not arguing the notion that all economists agree (which must therefore include himself).

    What I am unclear about is the cost benefit analysis. Clearly we would like to smooth the rough spots at the expense of the good spots. But what if it were not an even trade? When debt to GDP crosses a certain threshold then you may get knee capped later. On the other hand if debt is not excessive and you fail to stimulate then you could create another great depression.

    I do not know the general opinions on that, and generally feel that government stimulus is by definition inefficient, so am skeptical that we averted an otherwise disasterous outcome.

  28. no, the conservative anger is activist. Although there is real anger at the republicans, you are being optimistic to see this as a symmetrical situation.

  29. Obama and the Democrats haven’t done nearly enough. Reappointing Bernanke is reason enough to get rid of them. Unfortunately, the Republicans only offer to do less and so are no alternative.

    There isn’t nearly enough liquidity in the economy. Just look at recent evidence for strong deflationary forces, with little or no prospects for improvement at anytime in the near future. We risk spending years in a disinflationy, if not deflationary trap. Obama will be remembered as Hoover-light and will be ushered out of office a la Jimmy Carter in less than three years if things don’t change radically.

    This is not to speak ill of Carter, who frankly economically, morally, intellectually, and courage-wise had and has it all over Obama.

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