Artificial Stimulus

It’s too soon to say whether the stimulus package is working.

President Obama

Even before it was signed into law, President Obama’s $787 billion stimulus package was denounced as both too big (mostly by the right) and too small (mostly by the left) to succeed. Now, a mere five months later, it’s being declared a failure across the political spectrum.

Stanford economist Ed Lazear, who chaired President Bush’s Council of Economic Advisers from 2006 through 2009, took to the Wall Street Journal op-ed page Thursday, charging that the stimulus package has failed and accusing Obama of being a socialist. By late June, he notes, only $56 billion had been spent, and “a large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower.” Either way, it’s “not enough to make a meaningful impact.” (Getting a lecture from Lazear about dealing swiftly with a recession is pretty rich. In the face of rising job losses and a crumbling housing market in 2008, he refused to use the “R” word.) Greg Mankiw, the Harvard economist who also chaired the CEA in the Bush years, has highlighted the gap between the promises the administration made about how the stimulus would affect the unemployment rate and the reality. While noting that it’s difficult to hold administrations accountable for forecasts when economic conditions change rapidly, Mankiw nonetheless says that the Obama administration has “not been particularly forthright.” (Getting a lecture from Mankiw about candor on this subject is likewise rich, given that his CEA has been charged, convincingly, with conjuring up millions of projected jobs in a 2004 economic report.)

On the left side of the aisle, many of those who deemed the stimulus too small from the outset are now calling for more. The I-Told-You-So Caucus includes Berkeley-dwelling former Clinton administration officials like Brad DeLong and Laura D’Andrea Tyson, Warren Buffett, and Nobel Prize winners Joseph Stiglitz and Paul Krugman, plus a whole bunch of other economists tallied by the Center for Economic and Policy Research.

I am not an economist. Still, I am confident in saying that, just as it was absurd to talk about an Obama bear market in March, it’s much too soon to be condemning the stimulus package. Last Sunday, Vice President Joe Biden said the administration had misread the severity of the decline. But that’s not quite true, either. Rather, the “failure” of the stimulus may have been as much a failure of managing expectations as about managing public works projects.

Perhaps the biggest mistake stimulus proponents made was to suggest that this recession would (and could) end quickly. Modern America is not equipped—financially, socially, or psychologically—to deal with long recessions. We don’t have the safety net or the savings to cope with a protracted downturn. And fortunately, we haven’t had to. The last two recessions, which ended in 2001 and 1992, respectively, lasted only eight months each. But recessions brought on by financial crises are always deeper and more long-lasting than other recessions, as economists Ken Rogoff and Carmen Reinhardt show in this paper. By February 2009, when the stimulus package was passed, the recession was already the longest in 28 years; now it’s the longest contraction since the Great Depression.

What’s more, in the spring of 2009, the chore of restoring the economy to growth was a huge task. The economy was in a death spiral. Between the end of 2007 and the first quarter of 2009, Americans’ net worth fell by more than $12 trillion, nearly 20 percent. More than 6 million payroll jobs had been lost. The financial sector was essentially bankrupt. In the fourth quarter of 2008, the economy shrank at a 6.3 percent annual rate, and in the first quarter it shrank at a 5.5 percent rate. In a highly leveraged economy with an expanding population and work force, a few quarters of contraction at 6 percent are nigh cataclysmic.

Sure, Obama & Co. could have been more aggressive in January and February in talking about how bad things were (although the stock and bond markets were doing a pretty good job of communicating the misery). But the truth is that, due either to a misreading of the situation (Biden) or a desire to build confidence (Gross), the stimulus efforts were mislabeled. The Obama team spoke of the patient as if it were merely wounded, when it had flatlined. The big package was dubbed the “American Recovery and Reinvestment Act of 2009” when it should have been called the “American Systemic Failure Aversion Act of 2009.”

Of course it’s taking time for appropriated funds to trickle down into the economy. (You can follow the progress at, or at my colleague Chadwick Matlin’s new Recessionary Road” blog.) But even if the administration had infused hundreds of billions of dollars into the economy instantaneously in February and March, it might not have made a significant dent in the unemployment rate. After all, as some of the same folks who have declared the stimulus a failure have told us, unemployment rates aren’t the best way to measure the short-term success of economic policies. Bush economists thought the combination of fiscal and monetary policies in 2001 and ‘02 were highly successful in pulling the economy out of recession—even though the number of payroll jobs continued to decline for nearly two years after the economy started expanding in November 2001.

In Thursday’s Financial Times, Bruce Bartlett argues against a second stimulus and counsels patience. A $14 trillion economy doesn’t turn around on a dime. The stimulus may not be perfect, he says, “but it must be given time to work. People should not allow their impatience to lead to the adoption of policies that will not only fail to reduce unemployment this year, but could stoke inflation in the not-too-distant future.”

Of course, it’s easy for those of us fortunate enough to have jobs to counsel patience. But regardless of the policy implemented and the speed at which new cash enters the economy, this economic recovery will take time. Thanks to the long and sharp downturn, America has a huge amount of unused human and industrial capacity. The present gap between what the economy is capable of producing and what it is actually producing is very large, and no amount of stimulus can fill it instantly and effectively. We now face the prospect of a painful period of rehabilitation—saving, deleveraging, and cleaning up the mess. And then we will have to shift from an economy based on cheap money and consumption to one driven by … something else.