Monday, October 4, 2010

The Stimulus Simplified

Here is a chart compiled by Ezra Klein about a month ago, based on data from the Congressional Budget Office, showing the effects of the Recovery Act of 2009 on unemployment.  (There are similar charts in the Klein article and elsewhere showing the effects of the stimulus on GDP, and on overall employment.)

It seems incontrovertible that if many thousands of people are hired to build roads and bridges and other projects, if taxes are cut, and if the federal government increases aid to the states, all these measures must create economic activity.  It's not like all these stimulus projects could have taken jobs from the private sector, since the private sector has been busy laying off millions of workers since 2008.  Not only can and has all this activity been measured, overall economic statistics have also improved since the stimulus was enacted.  Yet those who opposed the stimulus when it passed Congress in 2009 continue to repeat, without evidence, that the stimulus is a failure, as if repetition of this mantra will make it true.

I try to understand the arguments of these opponents, but almost all of them merely illustrate a lot of well-known logical fallacies.  For example, the fallacy of inconsistency, i.e., the stimulus was a failure because it consisted of too much government pork, instead of tax cuts which stimulus opponents would have supported. This argument overlooks the fact that the stimulus actually included almost $300 billion in tax cuts.  If the government should have cut taxes instead, then a stimulus whose largest component was in fact tax cuts, could not have been a complete failure, by the opponents' own criteria.

Then there is the non sequitur: Christina Romer forecast that unemployment would rise to 9%, and unemployment actually rose to 10%, therefore the stimulus was a failure.  All this argument proves is that the forecast was wrong.  It says nothing about the effects of the stimulus, because it does not even address the question of what the unemployment rate would have been without the stimulus.  That question is addressed in the data summarized in the chart above.

Another logical fallacy is to confuse association with causation, which in this situation can be briefly summarized as follows: the economy still sucks, therefore the stimulus was a failure.  Again, the relevant question, admittedly not one to brag too much about, should be, how much worse would the economy have sucked without the stimulus, not how much the economy still sucks.  Theoretically, the stimulus could still have helped even if the economy continued to get worse, if data showed that the economy would have fallen even faster without the stimulus.  Instead the data show that GDP and employment have steadily risen since the stimulus, albeit at a slower rate than almost everyone would have liked.

Which leads to the next logical fallacy, the unfair argument that the stimulus might have helped, but it didn't help all that much, therefore it was a failure.  That is like saying blaming someone for their lack of progress in digging a ditch, when you didn't give him a big enough shovel to dig it with.  Many economists thought the size of the stimulus package should have been much larger.  It is manifestly unfair to blame the limited success of the stimulus on its limited size.  Especially when it was the opponents of the stimulus who caused its size to be so limited.

And if you want to see Rachel Maddow get just as frustrated as I do trying to explain all this stuff, check out this video:


  1. Yes, the stimulus (number 2 since G.W. Bush signed off on the 1st one in 2008) was such a resounding success that we now have the same people that fiercely demanded it and told us that all would be well with it telling us we need a THIRD one--now the liberal meme is that the ARRA was too small only after its meek results.

    There is no doubt that the economy sucks since we can see from hard numbers: GDP is in a downward trend after a brief sugar high in the 4th quarter of 2009 from the so-called stimulus package(s). Here are the GDP numbers:

    1st quarter of 2009: -4.90%

    2nd quarter of 2009: -.70%

    3rd quarter of 2009: 1.6%

    4th quarter of 2009: 5%

    1st quarter of 2010: 3.7%

    2nd quarter of 2010: 1.6% (revised downward from 2.4%).

    Maddow conveniently leaves out the last several quarters in her little graph to bolster her spin. No surprise there.

    The tax CREDITS (not cuts) in ARRA were short term deals. Consumers and businesses will always respond far better to LONG TERM tax cuts as was noted decades ago by Milton Friedman. Maddow is probably frustrated because she can't believe that everyone isn't gullible enough to believe her irremediable nostrums.

  2. The people who pushed for the stimulus mostly recognized at the time that it should have been significantly larger. But they also knew that it would be politically impossible to pass a bill with a price tag of more than $1 trillion, so they settled for the maximum they could get. And even that was whittled down to get the three Republican votes they needed to pass the bill in the Senate. (this was before Franken was seated and while Specter was still a Republican)

    So your argument seems to fall into at least a couple of the logical fallacies illustrated in my post. It's also factually misleading. Contrary to your statement, GDP is not going down, as it was at the beginning of 2009. Only the rate of increase in GDP has started going down. Those are two different things. I don't believe that was unexpected, as it is not uncommon to have a sharp upward correction followed by a much slower gradual improvement.

    And of course your argument does not address at all the question of whether the stimulus was helpful to the economy.

  3. The people who pushed for the stimulus also told us the Keynesian fallacy of the 1.5 multiplier effect—you know, that for every $1.00 spent of stimulus the economy would get $1.50 of growth—that didn’t happen.

    And as far as the new made up liberal narrative about how the Democrats wanted a bigger package that would have saved the economy and Republicans blocked them, President Obama and Democrats eagerly played the "catastrophe" card to sell their version of the economic stimulus plan while they were happy to shut out the Republican ideas of a major cut in the corporate tax. Instead of forging a bipartisan plan, Obama decided to let liberal bulls in the House write the bill. That is the reason the bill had run into political trouble and one of the reasons it was pared down. After the bill passed, Democrats crowed about how it would pave the way for a strong economy until it was obvious that it hadn’t. BTW, there were House Democrats and Senate Democrats that worked to pare the stimulus down because they didn’t like it from a fiscal standpoint.

    Contrary to your statement, GDP is not going down, as it was at the beginning of 2009. Only the rate of increase in GDP has started going down. Those are two different things.

    Those GDP numbers are from the commerce department and GDP is slowing. You’re stuck on semantics. And Maddow used GDP numbers in that clip to show that GDP was growing every quarter; if she were honest, she would have shown the recent quarters with slower growth.

    Incredibly, the ARRA has behaved very much like Cash for Clunkers, Cash for Caulkers, Cash for Appliances, Cash for Homes---for a brief period, they all created a sharp demand curve before plummeting back down: No real sustainable economic growth was created. This is because it is the private sector that creates real wealth, not the public sector or public programs. In order for all those public union jobs and public works programs to exist, they must take from the productive sector—the private sector. So essentially, we borrowed trillions from, mostly China, to create aggregate demand through federal programs, government labor, and transfers, and we have a middling economy that is still on its knees. Taxpayers are going to have to foot the bill for the interest and the principle on all the borrowed funds for ARRA and everything else. So, no, I don’t think the stimulus was helpful. It is a disaster.

  4. How are public works jobs taking anything from the productive private sector, when we have almost 10% unemployment, and the private sector has been laying people off for a couple of years now? These massive layoffs started way before this administration got into office. But since the stimulus was enacted, we are seeing net increases in private sector employment, in contrast to the decreases we saw before that.

    You are not recognizing that the "productive private sector" was on the verge of collapse two years ago. Government had to step in to make up for the freeze on lending and the collapse in demand that was putting the private sector in a death spiral.

  5. I never blamed the Obama administration for the recession. He inherited a severe downturn.

    Those public works jobs don’t pay for themselves, they rely upon tax revenue collected from individuals in the private sector. (I’m not saying that teachers, firefighters, etc are not doing important work, I’m just stating their obvious dependency.) While it is true that the past recession hit the private economy hard, the federal government decided to continue to fund public sector jobs through deficit spending instead of making commensurate spending cuts. The result on the federal balance sheet speaks for itself while higher taxes are sure to rise for everyone eventually.

    We will disagree on this but very little of the stimulus was aimed at private sector growth. Most of it was wealth transfers and government projects. Private sector job growth has been very tame compared to other recession/recovery cycles and overall, it smacks of “correlation does not mean causation” with the job growth that is occurring: It is simply the (upside down) bell curve of the business cycle. Nothing more.

  6. You are not recognizing that the "productive private sector" was on the verge of collapse two years ago. Government had to step in to make up for the freeze on lending and the collapse in demand that was putting the private sector in a death spiral.

    Credit markets were frozen but it was an exaggeration by the Bush administration to take the steps that were initiated. The laws and regulations that were already in place should have been allowed to function.