Assessing the effects of the stimulus package (ARRA 2009)

[BrainGlutton]

Spinoff from this thread.

The American Recovery and Investment Act of 2009. Estimated cost, $787 billion. Here’s the composition of the Act in graphic form.

Developments under the Act

The Congressional Budget Office reported in October 2009 the reasons for the changes in the 2008 and 2009 deficits, which were approximately $460 billion and $1,410 billion, respectively. The CBO estimated that ARRA increased the deficit by $200 billion for 2009, split evenly between tax cuts and additional spending, excluding any feedback effects on the economy.[73]

On February 12, 2010, the Bureau of Labor Statistics, which regularly issues economic reports, published job-loss data on a month-by-month basis since 2000.[74] Organizing for America, a community organizing project of the Democratic National Committee, prepared a chart presenting the BLS data for the period beginning in December 2007. OFA used the chart to argue, “As a result [of the Recovery Act], job losses are a fraction of what they were a year ago, before the Recovery Act began.”[75] Others argue that job losses always grow early in a recession and naturally slow down with or without government stimulus spending, and that the OFA chart was mis-leading.

In the primary justification for the stimulus package, the Obama administration and Democratic proponents presented a graph in January 2009 showing the projected unemployment rate with and without the ARRA.[1] The graph showed that if ARRA was not enacted the unemployment rate would exceed 9%; but if ARRA was enacted it would never exceed 8%. After ARRA became law, the actual unemployment rate exceeded 8% in February 2009, exceeded 9% in May 2009, and exceeded 10% in October 2009. The actual unemployment rate was 9.2% in June 2011 when it was projected to be below 7% with the ARRA. However, this can be accounted for by noting that the actual recession was subsequently revealed to be much worse than any projections at the time when the ARRA was drawn up.

Projected Unemployment RateAccording to a March 2009 Industry Survey of and by the National Association of Business Economists, 70.6% of their economists who had reviewed the fiscal stimulus enacted in February 2009 projected it would have modest to strong impact in shortening the recession, with 29.4% anticipating little or no impact. The aspects of the stimulus expected by the NABE to have the greatest effectiveness were physical infrastructure, unemployment benefits expansion, and personal tax-rate cuts.[76]

One year after the stimulus, several independent macroeconomic firms, including Moody’s and IHS Global Insight, estimated that the stimulus saved or created 1.6 to 1.8 million jobs and forecast a total impact of 2.5 million jobs saved by the time the stimulus is completed.[77] The Congressional Budget Office considered these estimates conservative.[78] The CBO estimated according to its model 2.1 million jobs saved in the last quarter of 2009, boosting the economy by up to 3.5 percent and lowering the unemployment rate by up to 2.1 percent.[79] The CBO projected that the package would have an even greater impact in 2010.[79] The CBO also said, “It is impossible to determine how many of the reported jobs would have existed in the absence of the stimulus package.”[80] The CBO’s report on the first quarter of 2010 showed a continued positive effect, with an employment gain in that quarter of up to 2.8 million and a GDP boost of up to 4.2 percent.[81] On the other hand, economists Timothy Conley of the University of Western Ontario and Bill Dupor of the Ohio State University used state level variation to estimate that while the stimulus created or saved 450 thousand government jobs, it destroyed or forestalled 1 million private sector jobs, thus costing jobs on net.[82] Conley and Dupor’s analysis has been criticized for its seemingly statistically irrelevant results.[83][84][85] Other researchers have come to significantly more positive conclusions about the bill’s effects on jobs. Economist Dan Wilson of the Federal Reserve, who used similar methodology, without the same identified errors, estimates that “ARRA spending created or saved about 2 million jobs in its first year and over 3 million by March 2011.” [86]

The CBO also revised its assessment of the long-term impact of the bill. After 2014, the stimulus is estimated to decrease output by zero to 0.2%. The stimulus is not expected to have a negative impact on employment in any period of time.[87]

In 2011, the Department of Commerce revised some of its previous estimates. Economist Dean Baker commented:

[T]he revised data … showed that the economy was plunging even more rapidly than we had previously recognised in the two quarters following the collapse of Lehman. Yet, the plunge stopped in the second quarter of 2009 – just as the stimulus came on line. This was followed by respectable growth over the next four quarters. Growth then weakened again as the impact of the stimulus began to fade at the end of 2010 and the start of this year. In other words, the growth pattern shown by the revised data sure makes it appear that the stimulus worked. The main problem would seem to be that the stimulus was not big enough and it wasn’t left in place long enough to lift the economy to anywhere near potential output.[88]

The Democratic Congressional Campaign Committee established a “Hypocrisy Hall of Fame” to list Republican Representatives who had voted against ARRA but who then sought or took credit for ARRA programs in their districts. As of September 2011, the DCCC was listing 128 House Republicans in this category.[89] Newsweek reported that many of the Republican legislators who publicly argued that the stimulus would not create jobs were writing letters seeking stimulus programs for their districts on the grounds that the spending would create jobs.[90]

The stimulus has been criticized as being too small. In July 2010, a group of 40 prominent economists issued a statement calling for expanded stimulus programs to reduce unemployment. They also challenged the view that the priority should be reducing the deficit: “Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s.”[91]

In July 2010, the White House Council of Economic Advisers estimated that the stimulus had “saved or created between 2.5 and 3.6 million jobs as of the second quarter of 2010.”[92] At that point, spending outlays under the stimulus totaled $257 billion and tax cuts totaled $223 billion.[93] In July 2011, the White House Council of Economic Advisers estimated that as of the first quarter of 2011,[94] the ARRA raised employment relative to what it otherwise would have been by between 2.4 and 3.6 million. The sum of outlays and tax cuts up to this point was $666 billion. Using a straight mathematical calculation, critics reported that the ARRA cost taxpayers between $185,000 to $278,000 per job that was created, though this computation does not include the permanent infrastructure that resulted.

In August 2010, Republican Senators Tom Coburn and John McCain released a report listing 100 projects it described as the “most wasteful projects” funded by the Act. In total, the projects questioned by the two senators amounted to about $15 billion, or less than 2% of the $862 billion. The two senators did concede that the stimulus has had a positive effect on the economy, though they criticized it for failing to give “the biggest bang for our buck” on the issue of job creation. CNN noted that the two senators’ stated objections were brief summaries presenting selective accounts that were unclear, and the journalists pointed out several instances where they created erroneous impressions.[95]

The Act, which from its earliest introductions had promised “shovel-ready” projects,[96] was dogged in implementation by slower-than-hoped implementation of, particularly, infrastructure projects.[97][98] At the Council on Jobs and Competitiveness in Durham, N.C. on June 13, 2011, President Obama joked “Shovel-ready was not as shovel-ready as we expected.”

Some of the tax incentives in the Act, including those related to the American opportunity tax credit and Earned Income Tax Credit, were extended for a further two years by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.[99]

In November 2011 the Congressional Budget Office updated its earlier reports concerning the Act. The CBO stated that “the employment effects began to wane at the end of 2010 and have continued to do so throughout 2011.” Nevertheless, in the third quarter of 2011, the CBO estimated that the Act had increased the number of full-time equivalent jobs by 0.5 million to 3.3 million.[100]

So. Was it worth the money? Would we be better or worse off, now, if the Act had never passed? Would we be better or worse off if the stimulus had been bigger?

[erislover]

Ask the future generations which will pay for it.

[BrainGlutton]

@erislover

Ask the future generations which will pay for it.

And are now being fed by it?

[Czarcasm]

@erislover

Ask the future generations which will pay for it.

You should put that on a bumper sticker or something.

[Happy_Fun_Ball]

@erislover

Ask the future generations which will pay for it.

Save our kids, cut education funding!

[ITR_champion]

@the material quoted in the OP

In the primary justification for the stimulus package, the Obama administration and Democratic proponents presented a graph in January 2009 showing the projected unemployment rate with and without the ARRA.[1] The graph showed that if ARRA was not enacted the unemployment rate would exceed 9%; but if ARRA was enacted it would never exceed 8%. After ARRA became law, the actual unemployment rate exceeded 8% in February 2009, exceeded 9% in May 2009, and exceeded 10% in October 2009. The actual unemployment rate was 9.2% in June 2011 when it was projected to be below 7% with the ARRA. However, this can be accounted for by noting that the actual recession was subsequently revealed to be much worse than any projections at the time when the ARRA was drawn up.

In other words, if your initial numbers are an embarrassment, make up new numbers and re-write history retroactively.

@BrainGlutton

So. Was it worth the money? Would we be better or worse off, now, if the Act had never passed? Would we be better or worse off if the stimulus had been bigger?

As ought to be plain to all, there are no controlled experiments in setting national economic policy. The government passed the stimulus package and unemployment soared above ten percent. No one can know for sure what unemployment would have been if we hadn’t passed the stimulus package. All of the numbers that are presented in that regard come from economic projections and models that are notoriously unreliable. As I already mentioned in the thread that fathered this one, Thomas Sargent, the Nobel Prize winner in economics in 2011, is among those who dismiss the models used to validate the stimulus package as being basically worthless.

The stimulus package may have created jobs or it may not have. One can hardly expect a pile of numbers based on models from the government itself and from "independent’ organizations with strong links to the government to convince skeptics that the government did the right thing.

[ITR_champion]

@L. G. Butts

Save our kids, cut education funding!

Given the fact that we’ve been jacking up education spending continuously for the past fifty years and seeing no improved results, I’d say that sounds like a plan.

It is, of course, true that the stimulus package handed a good-sized chunk of money to our educational institutions at all levels. How has education changed in the three years since then. Half of public schools are failing according to the government’s own standards. If there’s any indication that American colleges and universities are delivering a better education now than in 2009, I haven’t seen it.

[erislover]

@L. G. Butts

Save our kids, cut education funding!

My proposal would be to raise taxes, but hey, don’t let my actual positions get in the way of your conclusion-jumping perception.

[2sense]

Arguments from authority aren’t useful in this debate. There is a major split in economics between Keynesians and Anti-Keynesians. The former have built upon the work of John Maynard Keynes and accept his core analysis and their opponents do not. Both groups hold prestigious positions and have received prestigious awards. There is no lack of authorities saying the opposite things.

For myself, I can’t follow the math so I try to pay attention to the words. Predictions are usually understandable. Keynesians predicted that given the interest rate situation the Fed could expand the money supply without significant inflation. Their opponents differed. The Fed has done it (lets not get into exactly what “qualitative easing” entails) and look around. No major inflation.

Then there is the “confidence fairy”. Anti-Keynesians promote austerity because it will give investors confidence in the basic strength of a nation’s economy (since the country won’t be in danger of not being able to pay its bills). But is confidence really the issue? Why would people invest right now when the economy is not growing very much and the odds against new ventures are higher? The smart thing to do is to park your money and wait for safer investments.

[erislover]

@2sense

But is confidence really the issue? Why would people invest right now when the economy is not growing very much and the odds against new ventures are higher? The smart thing to do is to park your money and wait for safer investments.

Recessions are great times to take burdensome liquidity and snatch up failing ventures with valuable capital. It always pays to be rich.

[Fiddle_Peghead]

@ITR_champion

In other words, if your initial numbers are an embarrassment, make up new numbers and re-write history retroactively.

If you make projections based on data (the severity of the recession in this case) that turns out to be way off base, it makes perfect sense that your conclusions would also be in error. Can the administration’s underestimated unemployment projections be blamed on this? From the information in the link, I have no idea. But I also don’t see any “new numbers” being made up here.

[Gangster_Octopus]

@BrainGlutton

And are now being fed by it?

And will be driving on the roads and bridges built with it.

[2sense]

@erislover

Recessions are great times to take burdensome liquidity and snatch up failing ventures with valuable capital. It always pays to be rich.

Capital isn’t as valuable at the moment. Check out the interest rates. Money is cheap right now.

[scratch_llll]

Yes but peoples savings are down and loans are harder to get with banks tightening credit. Fluid capital allows for the taking of bargins (particularly in real estate) that are there because nobody else can take advantage of them.

[2sense]

Are banks tightening credit? I mean hopefully they aren’t lending to people who aren’t going to be able to afford the payments any more but I still get all those credit card applications in the mail.

And my understanding is that private debt is being payed down. (Krugman’s take)

[puddleglum]

@2sense

Arguments from authority aren’t useful in this debate. There is a major split in economics between Keynesians and Anti-Keynesians. The former have built upon the work of John Maynard Keynes and accept his core analysis and their opponents do not. Both groups hold prestigious positions and have received prestigious awards. There is no lack of authorities saying the opposite things.

For myself, I can’t follow the math so I try to pay attention to the words. Predictions are usually understandable. Keynesians predicted that given the interest rate situation the Fed could expand the money supply without significant inflation. Their opponents differed. The Fed has done it (lets not get into exactly what “qualitative easing” entails) and look around. No major inflation.

Then there is the “confidence fairy”. Anti-Keynesians promote austerity because it will give investors confidence in the basic strength of a nation’s economy (since the country won’t be in danger of not being able to pay its bills). But is confidence really the issue? Why would people invest right now when the economy is not growing very much and the odds against new ventures are higher? The smart thing to do is to park your money and wait for safer investments.

This is totally off base as to what Keynesians and non-Keynesians think. Krugman is the most prominent Keynesian and he has been pushing monetary policy lately so some people seem to think that expansionary policy is Keynesian. It is not. Expansionary fiscal policy is Keynesian and at the time of the stimulus monetary policy was being discounted because of a supposed Zero lower bound. Market monetarists have been arguing for expansive monetary policy since the start of the recession and Krugman and his disciples only jumped on when it was clear that fiscal stimulus did not work and we are not going to get more of it. Keynesians have never explained Japan which has had fiscal stimulus for 20 years, with non-expansionary monetary policy and has a no growth and the largest debt to GDP ratio in the world to show for it.
As to the example of why would people invest when the economy is not growing very much, the same can be said of stimulus. Even if the economy was growing faster why would you invest when anything you make off the investment will have to given to the government because taxes will have to rise to pay for the stimulus?