Five
years after the passage of the American Recovery and Reinvestment
Act, the biggest fiscal stimulus in the nation’s history, the
debate over its success hasn’t changed very much.
Democrats say it worked, providing a Keynesian jump-start to the
economy is a time of great distress. A White House report released
on the anniversary of the Act’s passage
touts millions of jobs created, economic aid to families and
individuals, and positive long-term growth effects, among other
gains.
Republicans say it was a waste of money with little to no
helpful effect. It hasn’t helped the middle class,
says the GOP’s Senate Minority Leader, Mitch McConnell. The
stimulus has “clearly failed,”
says Sen. Marco Rubio (R-Fl.), who calls the law “proof that
massive government spending, particularly debt spending, is not the
solution to our economic growth problems.”
All of this should sound rather familiar to those who’ve
followed the stimulus debate, because it’s more or less what the
two parties have been saying for years. One reason why I suspect
the debate has changed so little is that it’s very hard to
determine with great certainty what, exactly, the stimulus really
did.
That’s why I think the best way to judge the stimulus as a whole
is to say that we don’t really know how well it worked—but that it
didn’t live up to some of the promises that were made when it was
passed.
In theory, fiscal stimulus juices the economy through a
multiplier effect, in which one dollar of borrowed government
spending produces more than a dollar of overall economic gain. With
a multiplier of 1.5, a stimulus of $100 million would produce $150
million in economic activity. A multiplier of 2.0 would result in
double the economic jolt of the initial cash infusion. The higher
the multiplier, the bigger the boost.
The problem, as I noted in my April 2013 story
on the stimulus, is that no one really knows what multiplier effect
of fiscal stimulus is. Reputable economists don’t even really agree
about the possible range for the multiplier. Some economists think
it could be in the range of 3.0 or even higher, given the right
circumstances. The Congressional Budget Office puts the estimated
multiplier for government purchases at somewhere between 0.5 and
2.5. A broad survey of estimates by University of California San
Diego economist Valerie Ramey found that the range was usually
between 0.8 and 1.5, although the data could support anywhere from
0.5 to 2.0.
Dig a little deeper into the data and it gets more complex.
Estimates vary based on the timing, the economic conditions, and
the particular way the stimulus funds are spent. And it’s
practically impossible to verify empirically, because economists
can’t run controlled experiments on an entire economy. They end up
having to tease out the possible effects of stimulus
indirectly.
You’ll notice that some of those multiplier ranges actually dip
below the 1.0 mark. What that means is that the economic activity
created by stimulus is less than the original money spent,
potentially as low as 50 cents on the dollar. Not much of a
boost.
Despite the wide uncertainty surrounding these estimates, they
end up playing a major role in estimates of the stimulus’ effects.
That’s because when economists at the White House or the
Congressional Budget Office attempted to gauge the results of the
stimulus, they relied heavily on measurements of inputs rather than
outputs, and then used the multipliers to work from there. In other
words, they looked at the amount of money spent on stimulus and
then ran that through a model that included an estimated
multiplier.
If you build a model that assumes a high multiplier effect, then
your results will reveal that stimulus spending has a high
multiplier effect. What you won’t have done is proven that stimulus
spending has a high multiplier. But that’s how the government
estimates of stimulus effects on jobs and economic growth work:
Rather than measure real-world results, they count the spending,
assume a multiplier, and then report the output.
And what if the real-world effects were, in reality, radically
different? Would that show up in the reported estimates? No. When
CBO Director Douglas Elmendorf was asked, “If the stimulus bill did
not do what it was originally forecast to do, then that would not
have been detected by the subsequent analysis?” his response was:
“That’s right. That’s right.”
What we have then are highly uncertain, hard-to-pin-down
multiplier estimates being used not to measure the results of
stimulus, but to estimate what the results might be if those highly
uncertain estimates happen to be correct. That’s not a clear
failure, but it’s hardly proof of the unambiguous success the White
House and its allies have claimed.
So, it’s hard to say what, exactly, the stimulus did accomplish.
But we can say some of what it didn’t.
Most notably, it failed to hit the employment
targets drawn up by White House economic advisers prior to the
Act’s passage. In a
January 2009 report titled “The Job Impact of the American
Recovery and Reinvestment Plan,” administration economists
projected that with no stimulus in place, unemployment would
continue rising through 2010, topping out around 9 percent and
holding there for much of the year. With the stimulus, however,
unemployment would peak in the third quarter of 2009, then begin to
fall, dropping below 6 percent.
The stimulus passed, but unemployment rose higher and faster
than the administration’s no-stimulus track had projected.
Unemployment began to fall by early 2010, but not nearly as rapidly
as the administration’s estimates suggested.
Via Jim Pethokoukis of the American Enterprise Institute, here’s
a comparison between what the administration predicted, with and
without the stimulus, and what actually happened:
The administration’s defenders counter that the estimate was
made before the breadth and depth of the recession became clear,
and that a bigger stimulus was needed. But that only reveals how
hard it is to transform academic theory into practical political
reality, and how easily macroeconomic turmoil is misdiagnosed by
politicians and their advisers. It’s hard to have confidence in
their solutions when they admit they did not understand the
problem. And as Pethokoukis has
noted, when you factor in the dramatic decline in labor force
participation, the administration projection looks even rosier.
No doubt the political back and forth over the merits of
stimulus will continue, and the declarations of success and failure
will end up as fodder in fights over possible future fiscal policy
boosts. Not much will change. That’s too bad. Because if there’s
anything we should have learned from the fight over the nation’s
biggest fiscal stimulus, it’s that we’ve been asking the wrong
question. It’s not whether the stimulus did or did not fail, it’s
whether we can ever know one way or another. Combined with the deep
uncertainty of the economic evidence, the static nature of the
debate suggests that perhaps we can’t.
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