Was the Stimulus Irrelevant?

In early January, a joint paper [PDF file] by Dr. Christine Romer, then the nominee to chair the Presidential Council of Economic Advisers, and Jared Bernstein from Joe Biden's advisory team painted a bleak view of a world without the off-budget stimulus plan. This paper drove the administration's agenda on the stimulus bill and helped formulate the calculus that gave a much higher priority to public-works projects as opposed to tax cuts and business incentives. Failure to act, Romer and Bernstein warned, could have dire consequences (page 5):

The U.S. economy has already lost nearly 2.6 million jobs since the business cycle peak in December 2007. In the absence of stimulus, the economy could lose another 3 to 4 million more. Thus, we are working to counter a potential total job loss of at least 5 million. As Figure 1 shows, even with the large prototypical package, the unemployment rate in 2010Q4 is predicted to be approximately 7.0 percent, which is well below the approximately 8.8 percent that would result in the absence of a plan.

Sounds dire, doesn't it? Unemployment could hit 8.8 percent if Congress didn't start throwing money away immediately, and five million jobs could disappear. In fact, Figure 1 details the challenge better than the text does:

In February, the Obama administration demanded immediate action on the economy from Congress. Nancy Pelosi took charge of building a stimulus bill that wound up spending $787 billion dollars and shoving it through an offended House Republican caucus, while Harry Reid convinced three GOP Senators that the country would tumble into an economic abyss without it. The final bill passed in mid-February, intended to stave off the doomsday scenarios spun by Barack Obama's team of economic advisers.

After the passage of the bill authorizing the off-budget spending of almost $800 billion, one might have thought that the crisis represented by the light-blue arc would be avoided. Guess again. The Bureau of Labor Statistics reported that unemployment in April had risen to a peak of 8.9 percent, more than the doomsday scenario laid out by Romer and Bernstein in their January paper. In fact, March had exceeded the recovery-plan curve and the non-recovery plan curve, too, as this revised graph clearly shows:

This could have been worse, of course. The unemployment figures showed a net job loss of 539,000 in April, better than the adjusted loss in March of almost 700,000 jobs. However, many media outlets missed the fact that 611,000 private-sector jobs got lost in April. Massive government hiring lowered the overall figure, but 66,000 of the 72,000 new government hires came with the Census Bureau – temporary jobs for next year's decennial survey.

Not only did the stimulus plan not work, the unemployment actually rose faster with the “recovery plan” in place than the Obama administration predicted unemployment would rise without it.

Obama backers would say that the administration always predicted more job growth in the second and third year of the plan. Indeed, on page 8, the authors wrote:

The different components of the stimulus package also differ in terms of the timing of the jobs they will create, and therefore serve different purposes in terms of cushioning the downturn and fostering recovery. Because it takes time to carry out new spending programs authorized by legislation, we expect the jobs created by spending on infrastructure, education, health, and energy to be concentrated in 2010 and 2011. At the other extreme are funds to protect the most vulnerable, which are generally spent promptly, and tax incentives for businesses to invest quickly. State fiscal relief and broad-based tax cuts fall in between: funds for these programs can be disbursed quickly, but there can be a delay before the main response of spending.

Return, though, to the graph created by Romer and Bernstein. They clearly predicted that the main explosion of unemployment would come this year, tapering off into 2010 and going lower in 2011 whether or not the stimulus bill passed. The issue has been how high would unemployment initially get before a recovery would start creating jobs, and how fast would jobs get created. The graph shows that their primary purpose in pushing the stimulus was to keep unemployment from peaking above eight percent.

We spent almost $800 billion to keep that bubble low, and the stimulus failed completely at its task.

Note that in the graph, the two lines meet in 2014, meaning that the American economy would have recovered with or without the stimulus plan and that unemployment would return to five percent. Unfortunately, having spent the $787 billion, we have massive debt to repay when those lines meet, debt that we incurred in a failed policy of irresponsible spending when we should have been encouraging capital investment in private enterprise, the real engine of job creation. Even if we do return to 95 percent employment, each worker will carry the burden of debt from Romer, Bernstein, and Obama – a burden that paid no dividends but will encumber us for generations.

We only wish that the stimulus bill was as irrelevant as it was useless.