Pethokoukis

The Obama stimulus at 5: Did it work? On humility and high-causal density

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Happy anniversary, Obama stimulus! Five years after the signing of the American Recovery and Reinvestment Act into law, both opponents and proponents are rehashing the wisdom and efficacy of the government spending and tax-cut package. I’ve written frequently about the US economy’s failure to achieve Obama White House job and GDP growth projections. We still don’t have 5% unemployment or multiple years of 4%-plus GDP growth, as Team Obama economists predicted. Of course fiscal stimulus fans will argue the economy would’ve been much worse without the ARRA. And they have plenty of economic models to back them up, though not all do. Let the Multiplier Wars begin!

But life is complicated. In an excellent 2012 blog post, Russ Roberts argued for humility on both sides given the high-causal density of the US economy:

Step back for a minute and consider the challenge of measuring the impact of the stimulus. It is one of many things that happened between February 2009 and the end of 2010. For starters, massive reforms of health care and the financial sector were passed. They were passed but the details of how they would actually be implemented remained uncertain through the end of 2010 (and remain so today.) There was an unprecedented set of monetary interventions. From the end of 2008 through the end of 2009, the Federal Reserve’s balance sheet went from around $800 billion to about $2.2 trillion. And of course a million other things happened as well. The price of housing fell steadily during this period, the price of oil rose steadily, the recession officially ended and on and on and on.

No one has a model of the independent impact of these different factors or a way of measuring them accurately and reliably in a way that can be tested and confirmed or rejected. No one. That means everyone, on the left or the right, who claims to have evidence for the impact of one of them or who cherry-picks one of those out of the myriad to choose from and blames that one factor for the lousy pace of the recovery is either fooling himself or fooling you. Don’t be a fool. So when the E.J. Dionnes of the world tell you that government creates jobs, just ask them how they know. Their answer will be that someone with exemplary credentials says so. But there are those with exemplary credentials who say otherwise. Where does that leave us? It should leave us in ignorance and doubt. No certainty. No exclamation points. More humility.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

9 thoughts on “The Obama stimulus at 5: Did it work? On humility and high-causal density

  1. I trust that even using Russ Roberts’ standard, we can say with some confidence that the Obama administration policies collectively have had an adverse effect on the economy even if we cannot parse out with any precision the contribution made by any one of these individually.

    • Remember, the ~entire~ premise behind fiscal stimulus is that gov’t borrowing does not crowd out private investment, because there’s a general glut of savings — in other words, idle resources.

      You can disagree with that assumption, but unless you explicity acknowledge that disagreement, you’re not advancing the argument.

      • Is the anticipation of higher growth from a stimulus offset by the perception that higher debt levels will need to be serviced by higher levels of taxation or more borrowing or a combination of both or perhaps a cut in spending? If it is then a fiscal stimulus can have no effect or perhaps a negative effect on growth.

        And isn’t the notion of “crowding out” only strictly true in a closed economy or one where sovereign finance is mostly domestic in origin? In the case of the stimulus financing during the relevant period, over 50% of the deficit was financed overseas. That means that there wasn’t enough domestic savings or in your terms idle resources. The reason the stimulus was such a failure was that we have wrung out labor in most industries to such an extent that the stimulus was largely a capital stimulus. The equivalent of restarting a factory without workers. If the stimulus had instead targeted labor intensive service jobs such as gardening and cleaning services we might have seen an effect. And it could have been billed as the clean and green stimulus. :)

  2. Did the ARRA work? Measure it against what was promised. Two things immediately come to mind. Green energy investment and “shovel ready” jobs. With the latter Obama himself joked that no such jobs existed – indeed, in California most recently the massive “shovel ready” work project (high speed rail) has all but been tossed on the ash heap of history. Green energy? Anyone remember Solyndra?

  3. Let me remind you that the latest news from the Unemployment front says that 1,154,000 less Americans are employed today versus January 2008. Now someone tell me again about those 3,000,000 jobs added in 2010. The Heritage Foundation reports:

    Today [as of July 2013], 5.7 million fewer Americans are working or looking for work. This drop accounts for virtually the entire reduction of the unemployment rate since 2009—those not looking for work do not count as unemployed.

    Who is kidding who about the additional 3,000,000 jobs added in 2010?

    And as long as I am asking questions – Why did AEI use the Obama propaganda unemployment chart instead of one that displays actual unemployment rates vs projections?

  4. I suspect Russ (studied under him) would agree with the assertion that the stimulus failed by its own standard.

    Here is the financial autopsy –

    http://stawealth.com/daily-x-change/1957-5-years-later-what-did-the-arra-achieve.html

    “The failure of the stimulus was a failure of the neo-Keynesian belief that economies can be jolted into action by a wave of government spending. In fact, people are smart enough to realize that every dollar poured into the economy via government spending must eventually be taken out of the productive economy in the form of taxes. The way to jolt an economy to life and to sustain long-term growth is to create more incentives for people to work, save and invest. Let’s hope Washington’s next stimulus plan is aimed at reducing the tax and regulatory burden on American job creators.”

  5. The Fed—has been way too tight. That overrules everything else. Forget Obamacare and the $1 trillion sucked out of the private sector by the DoD, VA and DHS.
    If the Fed brings inflation to zero—and that seems to be the plan—then you ain’t going to have a recovery.

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