(Graphic from the Washington Post comparing Obama Administration projections of unemployment rates with and without stimulus with what actually happened even with the stimulus.)
Here’s a really excellent article by Ezra Klein from Sunday’s Washington Post (lead story–and a majority share of–the Business section) on how the stimulus turned out to be–not a “failure”–but certainly “not good enough.” Ezra explains the graph above:
The issue is the graph…It shows two blue lines sloping gently upward and then drifting back down. The darker line — “With recovery plan” — forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010.
Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administration’s economic policies. That line lets Republicans talk about “the failed stimulus.” That line that has discredited the White House’s economic policy.
But the other line — “Without recovery plan” — is more instructive. It shows unemployment peaking at 9 percent in 2010 and falling below 7 percent by the end of this year. That’s the line the administration used to scare Congress into passing the single largest economic recovery package in American history. That line is the nightmare scenario.
And yet this is the cold, hard fact of the past three years: The reality has been worse than the administration’s nightmare scenario. Even with the stimulus, unemployment shot past 10 percent in 2009.
Ezra points out that thoughtful critics of the stimulus don’t claim it didn’t help–just that it didn’t help as much as it could have:
Some partisans offer a simple explanation for the depth and severity of the recession: It’s the stimulus’s fault. If we had done nothing, they say, unemployment would never have reached 10 percent.
That notion doesn’t find much support even among Republican economists. Doug Holtz-Eakin is president of the right-leaning American Action Forum and served as Sen. John McCain’s top economic adviser during the 2008 presidential campaign. He’s no fan of the stimulus, but he has no patience with the idea that it made matters worse.
“The argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong,” he says. “If you throw a trillion dollars at the economy, it has an impact. I would have preferred to do it differently, but they needed to do something.”
A fairer assessment of the stimulus is that it did much more than its detractors admit, but much less than its advocates promised.
And most Democrats argue that it didn’t do enough because it wasn’t big enough:
Critics and defenders on the left make the same point: The stimulus was too small. The administration underestimated the size of the recession, so it follows that any policy to combat it would be too small. On top of that, it had to get that policy through Congress. So it went with $800 billion — what Romer thought the economy could get away with — rather than $1.2 trillion — what she thought it needed. Then the Senate watered the policy down to about $700 billion. Compare that with the $2.5 trillion hole we now know we needed to fill.
Ezra then explains the Administration’s logic–why the Administration really couldn’t hope for anything bigger (because of concerns about the debt), and how going as big as they were already going (in stimulus) means that eventually you have to spend money in less effective ways, after you use up the more effective ways:
Even if Congress had been more accommodating, there was a challenge to vastly increasing the size of the initial stimulus: The more you spend, the less effective each new dollar would become.
“We were trying to spend 10 times what had ever been spent in a year,” says Goolsbee, who chaired the Council of Economic Advisers until this year. “The tension was that the biggest bang for the buck comes from direct spending like infrastructure, but once you use up the big-ticket items, you eventually come to a point where the tax cuts are better bang for the buck than the 300 billionth infrastructure dollar.” And tax cuts, frankly, aren’t a very good bang for the buck.
Of course, the problem is that contrary to Austan Goolsbee’s description, policymakers did not line up the stimulus spending from most effective to least and pursue the most effective ones first. Along the way they had to constantly sprinkle in lower economic “bang per buck”–but higher political “bang per buck”–spending, just to get the Republicans to go along. How else can we explain how the Bush tax cuts for the rich became part of what was considered “stimulus” spending (in the lame duck session’s two-year deficit-financed extension of them), when those tax cuts have proven so ineffective at stimulating demand?
I’ve said this before–most recently here–that there’s lots of room for policymakers to do better in the future and to both more effectively stimulate the near-term economy and reduce the deficit, even right away, if they would consider swapping out the policies near the end of Goolsbee’s imaginary list for policies at the top. (Here’s a “real” list, from CBO; see Table 1.) But how can we clear out the influence of that “political bang per buck” list? Who knows, but maybe the “Occupy ___” movement could become part of the answer. If it turns out to be a “good enough” movement, that is.