The Anti-Obama Stimulus Argument Liberals Refuse to Address
The Washington Post today scolds the Romney campaign for ignoring pro-stimulus studies in its new economic policy white paper:
The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,” write economists Glenn Hubbard, Greg Mankiw, John Taylor and Kevin Hassett in a paper released by the Romney campaign. But the paper only mentions two studies, and one of them, by Amir Sufi and Atif Mian, is about Cash for Clunkers, a tiny subprogram of the stimulus.
A more comprehensive analysis of the studies that have tried to assess the stimulus leads to a very different conclusion. Last summer, I found nine such studies, seven of which found that the American Recovery and Reinvestment Act (ARRA) had promoted economic growth and reduced unemployment. A recent issue of the American Economic Journal: Economic Policy has six more papers assessing the stimulus, all of which conclude that stimulus works.
Two points here:
1. There is one bit of analysis and modeling about the Obama stimulus that the WaPo ignores -- that from the Obama administration.
In August of 2009, the White House — after having a half year to view the economy and its $800 billion stimulus response — made this forecast: Starting in 2011 — with the economy fully stimulated by the ARRA — growth would take off. GDP would rise 4.3% in 2011, 4.3% growth in 2012 and 2013, too. And 2014? Another year of 4.0% growth. The Obama Boom.
Here is what really happened. The Obama Boom never got off the runway. The economy grew just 2.4% in 2010, 1.8% last year, and is headed for sub 2% growth this year. And most Wall Street forecasts think 2013 won’t be much better if at all.
What happened?
Sure, the Great Recession was deeper than Team Obama knew at the time, but so what? As I wrote recently for the New York Post:
A Federal Reserve study from late last year looked at the behavior of recoveries from recessions across 59 advanced and emerging market economies during the last 40 years. The Fed found, to no great surprise, that recoveries ‘tend to be faster’ after severe recessions, such as the one we just had.
It’s the “rubber-band effect”: The deeper the downturn, the more robust the rebound. But under Obama, the rubber band snapped. Does it occur to Klein, Matthews and the Obama White House that maybe the stimulus didn’t quite work as expected? That maybe those “multipliers” didn’t quite multiply as expected?
2. One of the anti-stimulus studies Team Romney mentions is analysis by Taylor and John Cogan. Here is Taylor explaining his findings
The basic idea behind Keynesian stimulus packages is presented in basic college courses: A shift down in aggregate expenditures can be countered by increasing government purchases—augmented by possible multiplier effects—which shift up aggregate expenditures and fill the “gap.” Temporary changes in tax payments and transfers work the same way except that increased consumption is supposed to fill the gap.
Estimated macro models used for policy evaluation—whether old Keynesian or new Keynesian—have this basic mechanism built into them. … The problem with using these existing macro models to answer the question of this debate “Did fiscal stimulus help the economy?” is that they will simply repeat the same prediction story over and over again. You learn virtually nothing if you use the same models to evaluate the impact that you used to predict the impact. …
So it is necessary to look at what actually happened, to look at the changes in aggregate consumption or GDP due to the stimulus packages, and that is what I have done. … So when you look at what actually happened, you find that the stimulus packages in recent years did not help the economy; they did not significantly increase aggregate expenditures as the simple rationale for such Keynesian interventions suggests.
Kind of explains that errant Obama stimulus forecast, yes?
And — this is just for giggles – you know who agrees with Taylor and Cogan? Paul Krugman: “Taylor actually has a pretty good point: it’s far from clear that the ARRA actually led to much of a rise in government spending, while the tax cuts that made up much of the stimulus were probably largely saved.”
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Comments:
Jan '12
Re: The Anti-Obama Stimulus Argument Liberals Refuse to Address
I was all revved up to write something more meaningful here but Taylor's critique sums it up nicely. The macroeconomic models that are used to measure the impact and benefit of Keynesian stimulus programs are almost entirely formulaic. Pour government deficit spending into it and out pops jobs and lower unemployment. The models are pretty much non-falsifiable as there is no "control" experiment occurring simultaneously. This is precisely why this argument/debate will never, ever be solved no matter what the data actually says since someone can always make the arguments that things would be better if only the government had spent more. Why? Because that is what the model says.
May '10
Re: The Anti-Obama Stimulus Argument Liberals Refuse to Address
It always astounds me when I read these guys talk about tax cuts "being saved." Unless they are stuffed under the bed they become part of the money supply and are reinvested buy what ever group winds up with the investment funds from those apparently worthless saved marginal dollars from tax cuts.
Jun '12
Re: The Anti-Obama Stimulus Argument Liberals Refuse to Address
F. L. Booth
It always astounds me when I read these guys talk about tax cuts "being saved." Unless they are stuffed under the bed they become part of the money supply and are reinvested buy what ever group winds up with the investment funds from those apparently worthless saved marginal dollars from tax cuts. · 0 minutes ago
Not if there's a "liquidity trap" and banks hold on to the cash rather then lend it out. I think that's the implicit assumption most Keynesians are making when they talk about saving vs spending.
Not saying I agree with it, that's just the rationale.
May '10
Re: The Anti-Obama Stimulus Argument Liberals Refuse to Address
I have seen a multiplier effect from Government spending in developing countries, where infrastructure improvements liberates markets. I have never seen a multiplier work in a developed country.
I firmly believe that Govt. policies served to make the recession significantly worse.
- The financial repression used to make Govt. debt increases affordable, re-inflate the financial system and manipulate the markets, has been a virtual declaration of war on the middle class and pensioners.
- Massive increases in regulation have served to increase business cost and decrease market attractiveness. Ditto with tax policy. Uncertainty as to other insane policies have had a further dampening affect.
- The war against cheap energy has also had a directly unfavorable cost impact on the economy and served to hold back employment.
To be fair, this was a balance sheet recession that would normally require a deflationary period that would break the rubber band. However the Govt. has managed to do pretty much the exact opposite of what was required to restore economic health.
Oct '10
Re: The Anti-Obama Stimulus Argument Liberals Refuse to Address
I'm not sure why anyone would try and sell the stimulus. Whether or not it worked is frankly besides the point--the public hates it. On the topic of its efficacy, Obama basically bet that monetary policy had reached its limits. In such situations, fiscal stimulus in theory becomes very effective. But they were wrong; monetary policy still had a ways to go, and the market reacted to the stimulus by freaking out and delaying investment and consumption decisions.
I think it is true that if monetary policy is truly maxed out, you are so screwed that fiscal stimulus temporarily helps. But that wasn't the case, and I want to emphasize that it would be temporary.