Sunday, February 21, 2010

Separating Fact From Fiction: Re Stimulus

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Defending the stimulus -- the administration wastes its breath

February 17, 2010 PowerLine

It's a year now since President Obama signed the stimulus bill into law, and the anniversary has prompted the administration and its supporters to argue to a skeptical public that the stimulus has been a major success. Its main argument is that things would have been worse without the stimulus.

That may be true in some sense. For example, some state and local governments say they have been able, by virtue of stimulus money, to avoid laying off employees, including teachers.

But this is hardly the end of the debate. Even assuming that it's a good idea for the federal government to go take on more debt to relieve state and local governments from their budgetary crunches, wouldn't it have made more sense to just to hand over the money instead of paying for various pet projects dictated by Washington?

The same kinds of questions apply to the stimulus bill as a whole. The issue, as Reihan Salam points out, is not simply how the present situation compares to where we would be in the absence of any response by the federal government. It may well be that, by pumping more than $800 billion into the economy, the government produced a positive effect on the jobs situation in the short term. But even if it did, the questions would remain whether the "bang" was worth the "bucks" (and in particular the resulting increase in debt) and whether the money could have been put to better use.

For example, would a payroll tax cut -- which I advocated in late January 2009 -- have produced better employment results at a lower cost? Michael Boskin of Stanford, who was chairman of the Council of Economic Advisers under the first President Bush, argues that it would have. He estimates that cutting the payroll tax by six percentage points (of the 12.4% Social Security component) would, under standard assumptions, increase employment by three million to four million workers--an amount equal to all the job losses since the stimulus was passed.

The White House and its champions are avoiding these kinds of issues. Instead, they are touting a friendly piece by David Leonhardt of the New York Times. Leonhardt, in turn, cites a study by two economists (Carmen Reinhart and Kenneth Rogoff) who found that around the world over the last century, the typical financial crisis caused the jobless rate to rise for almost five years. I doubt, however, that the experience of disparate economies over a period of 100 years tells us anything important about the employment picture we should have expected in this country as a result of the recent financial crisis.

Moreover, Leonhardt neglects to mention that Reinhart and Rogoff warned that debt levels we are approaching in this country represent a serious threat to robust economic growth. "If history is any guide," says Reinhart, our rising government debt "is very troubling for the U.S. and other advanced economies."

In any event, the administration isn't likely to persuade folks that the stimulus succeeded based on the fact that we didn't have five years of rising joblessness. It predicted that the stimulus would keep the unemployment rate from exceeding 8 percent. The public isn't likely to accept very much lowering of that bar.

In sum, the White House might as well have saved its breath this week. The battle over how the public perceives the stimulus legislation isn't lost, but Obama can only win it through the future performance of the economy.

JOHN adds: I agree with what Paul says, and would add this: close to half of the "stimulus" funds have still not been spent. What does that tell us? If the "stimulus" was really the only thing standing between us and the Second Great Depression, as the Democrats now risibly claim, is it credible that they would only have gotten around to spending half the money in a year? I don't think so. It seems pretty obvious, on the contrary, that the Dems spent the money they really cared about--supporting public employees and their unions--and let everything else slide.


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