I, and others, have given the Obama administration a lot of flak for its early 2009 prediction that its $800 billion stimulus plan would drive the unemployment rate to under 6% by 2012. The fact that unemployment is over 8% might lead one to conclude that those fancy economic models with their Keynesian multipliers were wrong.
But Obama supporters defend the forecast by arguing that White House economists were basing that prediction on incomplete numbers that didn’t reflect the true severity of the downturn. Once the data were revised, White House economists seemingly made more accurate predictions.
For instance, here’s what former Obama economic adviser Austan Goolsbee tweeted the other day when the June jobless report — which showed an 8.2% unemployment rate — was released:
Indeed, you can find that forecast in the 2010 Economic Report of the President. And, I guess, we should conclude from that accurate CEA forecast that the $800 billion stimulus really did perform pretty much as expected, right? The White House predicted 8.2% and that is exactly what we got. Score one for Keynes — and the idea the stimulus should have been larger.
But here’s your trouble: In that report, the Council of Economic Advisers also predicted that the U.S. economy would grow by 4.3% in both 2011 and 2012. Instead, the economy grew by 1.7% in 2011 and might not do much better this year — if not worse. (First quarter GDP expanded at 1.9%, and many economists see the second quarter also sub-2%.) As a result, we have a $13.3 trillion economy instead of the $14.3 trillion economy Team Obama predicted (looking at just the underperformance in 2011 and 2012).
And here’s the puzzle: How can GDP growth be less than half of what Team Obama predicted in 2010 for 2011 and 2012, while the unemployment rate is exactly what Team Obama predicted? Less growth should have produced at least a somewhat higher unemployment rate, right?
The answer is almost certainly that White House economists didn’t expect a shockingly sharp drop in the labor force participation rate since they didn’t expect GDP growth to be so miserable. The size of the active workforce as a share of the total population fell from 64.5% in November of 2010 to 63.8% last month even as the economy was slowly expanding.
If Obama economists had known the economic recovery would be so weak the past two years, they might have expected a much, much higher unemployment rate. In November of 2010, the Congressional Budget Office predicted the labor force participation rate would be roughly 65.5% in 2012, even though it saw GDP growth of 1.9% in 2011, accelerating after that. Everything else being equal, a participation rate that high today would translate into a 2012 unemployment rate of 10.6%.
But the impact of such a weak recovery has resulted in a historically weak labor market where so many folks have given up that it has driven the official unemployment rate to 8.2% rather than 10.6%.
Bottom line: The $800 billion stimulus does not seem to have produced the sort of economic growth — less than 2% instead of over 4% — that was predicted, raising serious question about whether another round should be tried, as the White House and some left-of-center economics contend.