Pethokoukis

Well, I think we have a final verdict on the Obama stimulus

Image Credit: White House Flickr

Image Credit: White House Flickr

The US economy grew at a revised 2.7% in the third quarter, according to the Commerce Department, vs. the  2.0% rate reported previously. Good news? Not really. RDQ Economics:

The upward revision to GDP is less positive than it first seems since it was more than fully driven by a larger-than-previously reported inventory build (at an annualized rate, nonfarm inventories rose by around $89 billion in the third quarter), while underlying growth in terms of real final sales or final sales to domestic purchasers was revised down slightly.  A rising inventory build (and nonfarm inventories rose at their fastest pace in two years) is often a harbinger of slower growth and, at this point, we would look for a sub-2% reading on fourth-quarter growth.  

And Citi:

Final domestic demand rose just 1.7%, barely stronger than 1.4% in 2Q. Real consumer spending rose 1.4%, softer than expected, though cyclical components of spending like durables were solid. (+8.7%). Of greater concern, investment was revised down to a 2.2% rate of decline from -1.3%. Some unusual boosts to 3Q will not repeat in 4Q. Government outlays rose 3.5% on a 12.9% surge in defense spending, which seems likely to reverse near term. Inventories also boosted real GDP a sharp 0.8 percentage point. Falling farm inventories in particular should drag on 4Q growth. We continue to expect a sub- 1% reading from 4Q real GDP.

IHS Global Insight:

Although GDP growth was revised up to 2.7% from 2.0%, this was not a healthy report. Of the 2.7% growth rate, 0.8 percentage point comes from inventory accumulation, and 0.7 percentage point comes from a spike in federal spending (mainly defense). These won’t be repeated – in fact they’ll probably go into reverse in the fourth quarter. Everything else combined contributed just 1.2 percentage points to growth.

Consumer spending growth was sluggish at 1.4%, business fixed investment declined, and even though exports did better then first thought they were only up 1.1%. The one shining star was residential fixed investment, up 14.2% as the housing recovery kicked into gear.

If we can move towards a credible long-term deficit reduction plan, and at the same time avoid tightening fiscal policy too much, too soon, the combination of a continuing housing recovery with a return of business confidence should see growth accelerate sustainably over the course of 2013. But the immediate growth outlook is soft. The special factors that helped Q3 won’t help Q4, while the fiscal cliff uncertainty will continue to be a drag. And Sandy will hurt too. We expect Q4 growth of only around 1%.

OK, I think we’ve seen enough here. It looks like 2012 will end on a weak note with most economists viewing 2013 as probably more of the same — and that assumes we don’t plunge over the fiscal cliff and suffer another recession. For comparison purposes, let’s first review Obama White House economic forecasts since 2009:

1. In August of 2009, Team Obama predicted GDP would rise 4.3% in 2011, followed by 4.3% growth in 2012 (and 4.3% in 2013, too).

2. In its 2010 forecast, Team Obama predicted GDP would rise 3.5% in 2012, followed by 4.4% growth in 2013, 4.3% in 2014.

3. In its 2011 forecast, Team Obama predicted GDP would rise 3.1% in 2011, 4.0% in 2012, 4.5% in 2013, and 4.2% in 2014.

4. In its most recent forecast, Team Obama predicted GDP would rise 3.0% this year and next, and then 4.0% after that.

Instead, GDP grew 2.4% in 2010, and 1.8% last year. So far this year, quarterly growth has been 2.0%, 1.3%, and 2.7% — with maybe 1.5% in the current quarter. Instead of quarter after quarter of 4% growth, we’ve had just two: The final quarters of 2009 and 2011. Other than those, we’ve haven’t had a single quarter with growth higher than this quarter’s 2.7%. It’s why we still have massive employment and output gaps.

At the very least, I think the folks making the case that the Obama stimulus “worked” need to account for growth that has been less than half of what the Obama White House predicted. It’s not like they didn’t know the historical record of economies after bank and housing busts. All that stuff, one would assume, was factored into these forecasts.

Michael Grabell, a reporter for ProPublica, documented the many failings of the American Recovery and Reinvestment Act in “Money Well Spent? The Truth Behind the Trillion-Dollar Stimulus, the Biggest Economic Recovery Plan in History.”

In reporting on the stimulus over three years, I traveled to 15 states, interviewed hundreds of people and read through tens of thousands of government documents and project reports. What I found is that the stimulus failed to live up to its promise not because it was too small (as those on the left argue) or because Keynesian economics is obsolete (as those on the right argue), but because it was poorly designed. Even advocates for a bigger stimulus need to acknowledge that their argument is really one about design and presentation.

Grabell, shorter: Big Government messed up the Big Spend. Vice President Joe Biden said the stimulus would “literally drop kick us out of the recession.” But Grabell concludes that “the stimulus ultimately failed to do what America expected it to do — bring about a strong, sustainable recovery. The drop kick was shanked.”

23 thoughts on “Well, I think we have a final verdict on the Obama stimulus

  1. I am a staunch Austrian economist (meaning I believe is extremely limited government intervention in the economy. Booms and busts are a natural cycle. Any intervention will just make the boom/bust longer and more severe than it would have been normally. It is best to allow prices to convey the proper information to all economic actors and allow them to use that decentralized knowledge to best allocate their resources). The best part about being an Austrian economist, and politically a limited government advocate, is the government makes my case for me. We’ve all heard of all the ways the stimulus supposedly succeeded. But the proof is in the pudding. Even if we take the numbers at their face value (and I have argued elsewhere there is little reason to do so), they demonstrate a massively failed policy:

    -”The stimulus added jobs!” Sure, at the cost of about $200,000-$300,000 per job.

    -”The stimulus is an investment in green energy, our future!” The future is all well and good, but it doesn’t help us now. Besides, many of those green firms are now bankrupt.

    -”Without the stimulus, the recession would have been worse!” That is demonstrably false. The economy was already showing signs of recovery before the stimulus was passed.

    -”With the stimulus, the auto companies would have gone bankrupt!” They went bankrupt anyway.

    -”We had to do something!” Who is this “we”? People were doing something.

    -”GDP would be lower if it weren’t for the stimulus.” No, it probably would be higher. Considering the GDP gap was about $1 trillion at the deepest part of the recession, the government has spent close to $2 trillion, and the GDP gap is now wider, it would suggest the Keynesian government spending multiplier is less than 1 (in other words, every dollar spent by the government generates less than a dollar in the US economy).

    Sometimes, no matter how politically inconvinent it is, one just has to admit the policy has failed. To continue to defend an empirically bad policy is just foolishness.

    By the way, if I failed to address any of the other supposed successes of the stimulus, please add them below.

    • You missed addressing the “jobs” saved in some cases were not jobs but just raises where their raises were saved by the stimulus bill but they were never in any danger of losing their jobs. So saving someone’s $3000 raise to their annual salary cost $200,000 – $300,000. An even worse return than if it was a $15,000/yr job. At least that would have put someone back in the workforce however you want to look at it. Not that I was for the stimulus, ever.

  2. the only thing the stimulus really did was borrow money from the future (debt) in order to keep aggregate demand high enough to keep the economy from spiraling into a liquidity trap/depression.

    People who disagree with the premise:

    1. – seem to forget that Obama was following advice of respected economists – not without controversy but advice followed rather than personal ideas implemented.

    2. – the Congress had to approve every penny of it.

    • Nah, you needn’t worry about my religion. I laugh at it all the time. I say if you can’t make fun of something then it probably isn’t worth taking seriously.

      Think about Christianity for a moment:

      I believe a carpenter who lived thousands of years ago had magical powers. He was killed and came back to life. So, the celebrate, I kneel before an ancient torture device and consume his flesh and blood.

      How weird is that?! :-P

      • how weird? About as weird as a Christian being a Libertarian!

        no offense.. but it is a bit strange since my view of religion is that they are not, in general, Libertarian in their principles but perhaps I need some “correction”.

        • Yes. Being a religious man makes me somewhat of a minority in libertarian circles. Maybe it’s just the ones I hang out with, but libertarians do tend to be atheist.

          I could launch into a long-winded explanation of the tenants of my faith and world-view, but I feel that would bore you, so I’ll stick to the basics.

          I was raised in a sect of Protestantism called Congregationalism. It’s a relatively small sect, not found in many places outside of New England. Congregationalism stresses a very personal relationship with God; you don’t need a priest or pope to absolve you on your sins or perform the Holy Sacraments. Every man has a divine spark within him/her, and thus can perform the duties of any ordained minister. We do still have ministers who generally handle these functions, but they are more “experts” rather than divine appointees. Congregational churches are loosely affiliated with each other through the greater church body called the United Church of Christ (UCC). The UCC has a ruling body not unlike Congress (I represent my church) who sets basic standards for the churches (liturgical calendar, for example) and helps/advises member churches, but for the most part, the churches are left alone. You could go to a Congregational church in Boston and have a different experience than going to one in Montpelier.

          I think that semi-independent attitude (combined with my father’s distrust of the Catholic Church) helped shape my political views of mistrust of concentrated power.

          I do want to make one point: I am no friend of organized religion. Some people think that, to be religious, you need to go to church and follow some prescribed ancient ritual. I disagree. I do go to church and follow the rituals because I enjoy it. But in the end, redemption and salvation can only be achieved by the individual. Merely having a priest say you are forgiven of your sins is meaningless if the individual does not truly repent. Merely eating communion wafers and drinking the wine is useless if one does not believe.

          This is probably way more than you had anticipated. Seems like my “stick to the basics” is still me rambling. :-P

          I have friends who do not understand my beliefs. That is fine. They do question my faith or challenge me to “prove” God exists. My typical answer is this: What have I got to lose? Best case scenario, the is a God, there is a Heaven, and I am Redeemed. Worst case scenario, there is no God and I cease to exist. Either way, you would be there to tell me ‘I told you so.’ :-P

          • Jon – I appreciate the explanation and no it was not too long or detailed and yes I very much respect the tenets you ascribe to.

            I started out Catholic, then Baptist and then Episcopal.

            None of them “took” and my view is now that most of us know the difference between right and wrong and other basic morals that often come down to whether you would like to be treated as you are treating others.

            but where does your Libertarianism come from if not your religion?

          • Libertarianism, for me, is fairly new. I’ve only started identifying myself as such in the past three years or so. For the longest time, I called myself a conservative and a Republican. As I learned more and more about the GOP and modern conservatism, I found I had serious moral issues with some of their goals (anti-gay marriage, for example, or anti-abortion) and all of their methods. So, I left the GOP and joined the Democratic party, seeing how their social goals were more in line with my own views. As I got to know more about the Democratic party, I found I had serious moral issues with their methods. So I left the Democratic party and have been floating aimlessly ever since (I have worked closely with the Libertarian party in the most recent election, but I do not officially belong to that party. I just don’t like paying membership dues).

            I think where religion comes in is the fact I am a nonviolent person. Whenever an emotion is used in context to God, it is always love (He loved the world so much He sent his only son to be among us and to die with us so we may be saved, John 3:16). Love is what makes humanity most divine. The 10 Commandments can be broken down into 2: Love God and Love Humanity. They say God created Man. Well, how are children brought into this world? Though the love expressed by a man and a woman. How can a child best be raised? By a loving family. Love is divinity and it is when we love that we are most divine.

            Love, I feel, excludes force. If I truly love my neighbor as I do myself, than I cannot force him to do anything. I can try to convince him, but if he is unswayed by my actions, that does not allow me to force him to try to see the light.

            The story of Jesus and the Apostles is not a violent story. In the Gospels, Jesus is always holding back the Apostles from violent acts, whether it be preventing Peter from killing a soldier in the Garden of Gethsemane, or rebuking the Apostles for complaining about others healing in Jesus’ name. How I read the Gospels is of a control of man’s inner desire to control his surroundings. The 12 are very impulsive and Jesus is there to control them and to teach them to turn the other cheek, so to speak. I guess that is what I see for all of us: impulse control.

            Did that make any sense? Or am I just rambling. This is hard to articulate.

          • No, you are making perfect sense and I very much appreciate you sharing it.

            I knew for the git go – that you were different from a lot of the Libertarian types who frequent these pages and the more I learn about you the more I respect you.

            Can’t say that about all the others… :-)

          • Oh, figures, that one posts.

            Maybe need to split this up

            First half:

            They’re good people. Just…aggressive.

            I try to be more calculating and careful with my words on the Internet. You cannot look into my eyes or see my face, which makes communication so much more difficult. I have found we, as a species, communicate much more with our bodies than we do with our words. When body language is taken out of the equation, one can very easily misinterpret the motives of the speaker.

            I know I can sometimes come off as a jerk. Hell, maybe I am a jerk and just am deceiving myself. Who knows?

          • Second half:

            Let me tell a quick story on my economic and political views (I promise it is quick):

            Last February, I went down to Las Vegas with a former professor of mine. He is a true Keynesian: he generally believes that markets operate best when free, but in a time of a bust, the government can/should step in to right the ship.

          • Well, the ending goes like this: I think Keynes was on to something. I’ve just not the right people with the right knowledge to implement it.

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