The Great stimulus debate.

• Author: Bartlett, Bruce
• Position: A SYMPOSIUM OF VIEWS

Background

For some months, there has been an intense debate over the appropriate fiscal stance going forward. Does economic weakness require more fiscal stimulus? Are large budget deficits holding back growth ? Is it possible for fiscal consolidation--the latest preferred term for deficit reduction to be expansionary? What follows is a selection of analyses and commentaries underlying the debate.

Is Government Spending Stimulative?

The principal economic agencies of the U.S. government continue to argue that the fiscal stimulus enacted in 2009 worked largely as planned, a view endorsed by mainstream economists such as Mark Zandi of Moody's Analytics. This view is not universal Economist John Taylor, for example, is among the most prominent critics; he argues that the evidence supporting stimulus is weak.

The White House View

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"following implementation of the ARRA [2009 Obama fiscal stimulus], the trajectory of the economy changed materially toward moderating output decline and job loss. Real GDP began rising in the third quarter of 2009 and payroll employment began to grow in the first quarter of 2010.

"The two CEA methods of estimating the impact of the fiscal stimulus suggest that the ARRA has raised the level of GDP as of the first quarter of 2010, relative to what it otherwise would have been, by between 2.5 and 2.9 percent. These estimates are very similar to those of a wide range of other analysts.

"The CEA estimates that as of the first quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.2 and 2.8 million. These estimates are similar to those of other analysts, and are broadly consistent with the direct recipient reporting data available for 2009:Q4."

--Council of Economic Advisers, The Economic Impact of the American Recovery and Reinvestment Act of 2009: Third Quarterly Report, April 14, 2010

The U.S. Congressional View

"CBO has estimated the law's impact on employment and economic output using evidence about the effects of previous similar policies on the economy and using various mathematical models that represent the workings of the economy. On that basis, CBO estimates that in the first quarter of calendar year 2010, ARRA's policies:

"Raised the level of real (inflation-adjusted) gross domestic product (GDP) by between 1.7 percent and 4.2 percent, lowered the unemployment rate by between 0.7 percentage points and 1.5 percentage points, increased the number of people employed by between 1.2 million and 2.8 million, and increased me number of full-time-equivalent (FTE) jobs by 1.8 million to 4.1 million compared with what those amounts would have been otherwise. (Increases in FTE jobs include shifts from part-time to full-time work or overtime and are thus generally larger than increases in the number of employed workers.)

"The effects of ARRA on output and employment are expected to increase further during calendar year 2010 but then diminish in 2011 and fade away by the end of 2012."

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--Congressional Budget Office, Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from January 2010 Through March 2010, May 2010

One Economist's View

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"The economy has made enormous progress since early 2009. A year and half ago the global financial system was on the brink of collapse and the economy was engulfed in the Great Recession, the worst downturn since the Great Depression. Real GDP was plunging at an annual rate of more than 6 percent, and monthly job losses were averaging close to 750,000. Today, the financial system is operating much more normally, real GDP is advancing at a nearly 3 percent pace, and monthly job growth--excluding temporary hiring for the 2010 census--is nearly 125,000. [...]

"That the Great Recession gave way to recovery as quickly as it did is largely due to the unprecedented monetary and fiscal policy response. The range of efforts by the Federal Reserve, the Bush and Obama administrations, and Congress is stunning. The effectiveness of any individual aspect of the policy response is debatable, but there is no debate that, in total, the response was very effective. If policy makers had not responded as aggressively and quickly, the financial system would arguably still be unsettled, the economy still in a downturn, and the costs to taxpayers would be measurably greater. [...]

"Critics who argue that the ARRA failed since it did not keep unemployment below 8 percent, as the Obama administration projected it would when lobbying to get the legislation through Congress, are wrong. Unemployment was already above 8 percent in February 2009, when the legislation was passed; administration economists did not know that at the time, because of lags in the data and the rapid rise in unemployment that was occurring. I hey, like most private forecasters, including Moody's Analytics, misjudged how serious the downturn had already become. If anything, this suggests the stimulus provided in the ARRA was not large enough."

--Mark Zandi, testimony before the House Budget Committee, July 1, 2010

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A Counterview

"Unfortunately, most attempts to answer the question What was the impact of the fiscal stimulus?' are still based on economic models in which the answer is built-in, and was built-in well before the stimulus package was enacted. Frequently the same economic models that said, a year and half ago, that the impact would be large are now used to show that the impact is in fact large. In other words these assessments are not based on the actual experience with the stimulus. I think this has confused public discourse. [...]

"My analysis of the government spending part of the stimulus suggests that it had little to do with the turnaround in...