The constant backwards-looking nature of our political debate means we don’t put as much of a focus on that which could move us forward, regardless of the slip-ups in the past. But from a historical point of view, it’s important to properly assess the past so we learn something from it. In that spirit, I highly recommend Christina Romer’s honest take on the stimulus.
In an election year, we’ve often gotten this binary description of the stimulus, it either being the transformative policy of an era or a wasteful nothingburger. In reality, you can incorporate both of these takes into a nuanced view, where the stimulus is valuable in saving and creating jobs, but also inadequate as a full program for recovery. Romer, despite her past position as the head of the Council of Economic Advisers, delivers this viewpoint.
She starts with a conventional look at how many jobs the Recovery Act created, as well as the knock-on effects.
Two careful studies have looked at the relationship between this formulaic spending and employment. Both find that states that received more money fared substantially better. This is the strongest direct evidence that the Recovery Act contributed to employment growth. Based on the estimated size of the effect, the studies suggest that the act created more than three million jobs [...]
In addition to its near-term jobs effects, the Recovery Act may also be having more lasting benefits. It’s too early to measure the value of the roads, bridges and airports improved through stimulus funds. But a survey of influential studies looking at highway construction in the 1950s and ’60s suggests that such investments contribute substantially to long-term growth.
Likewise, the Recovery Act’s funding of basic research and clean-energy technology is only just beginning to pay dividends. And, contrary to some claims, the Government Accountability Office has found that those investments were accompanied by almost no fraud and abuse.
But she’s enough of an empiricist to explain that this wasn’t enough to dig the economy out of its hole.
Most obviously, it was too small. When we were designing it, most forecasters estimated that the United States would lose around six million jobs during the recession without fiscal stimulus. Compared with this baseline, creating three million jobs would have filled roughly half of the employment hole.
As it turned out, even with the stimulus, we lost almost nine million jobs. Indeed, because of horrific job losses in late 2008 and early 2009, we’d nearly passed the six-million mark before the Recovery Act was even signed. Adding in the estimated effect of the act, the correct no-stimulus baseline was a total employment fall of nearly 12 million. With a loss that big, creating three million jobs was helpful, but not nearly enough.
Romer adds some additional points. She says that the mix of taxes and spending might have been suboptimal. The tax cut for workers, which most didn’t know they received, had a nominal impact. And Romer laments the lack of a direct employment program. Perhaps most important, Romer provides an empirical analysis of how stronger support for the program can have legitimate effects on the positive impact. This part sounds a bit too close to the confidence fairy, but she cites analysis of the New Deal that showed that Roosevelt’s commitment to bold experimentation and action to create jobs actually impacted consumer and business expectations, which led to more growth.
We can say that the stimulus created a decent amount of jobs and also wasn’t the cure for the disease of the Great Recession. As Dean Baker writes, the failure to build on the stimulus as an ongoing need to fill a $1.2 trillion annual demand hole means that the program basically never had a chance to fully succeed, given its size and scope.
Simply demonizing the stimulus as a flawed program undermines the case for Keynesian spending in a downturn. Rather than that, you could focus on the areas where the stimulus had a positive impact, and how that needs to be replicated.