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Admitting that the Stimulus Failed

Originally Published in the Herald-Mail

Economic & Fiscal Policy

by Thomas A. Firey

OP-EDS

For five years now, American policymakers have tried to fix the nation’s economy. Republican and Democratic presidents and Republican and Democratic congresses have passed numerous stimulus measures and jobs bills[1], and the Federal Reserve has launched several programs intended to get the economy rolling. Yet the outlook remains grim. The latest Labor Department jobs report classifies 8.1 percent of American workers—12.5 million people—as unemployed, 5 million of whom have been out of work “long-term.” Another 8 million are working part-time though they want full-time jobs. And millions more have dropped out of the labor pool altogether because of bleak prospects.[2]

Given those numbers, it seems indisputable that all of the government stimulus efforts have failed. Yet fans of stimulus claim that the efforts have “worked,” or else that the only problem is that the efforts weren’t big enough. Are these people credible?

Many stimulus supporters claim the efforts succeeded because they “created jobs.” For instance, writer Michael Grunwald defends the 2009 American Recovery and Reinvestment Act (ARRA), saying that “at its peak, [ARRA] directly employed more than 700,000 Americans on construction projects, research grants and other contracts,” and that it “created or saved” another 1.4 million jobs indirectly.[3] However, even assuming his numbers are correct, ARRA and the other stimulus measures were supposed to do far more than create a relatively few (in a U.S. workforce of more than 150 million people) temporary jobs. They were supposed to stimulate (hence the name) broader economic activity as government dollars were re-spent by the people who received them, and then re-spent again and again. At least, that’s what Obama administration economists claimed when they unveiled ARRA, adding that it would lower U.S. unemployment to 5.5 percent by September 2012.[4]

Other stimulus supporters say it succeeded because U.S. gross domestic product is now growing. The solid line in the nearby graph traces the recent rise in U.S. GDP, which roughly speaking is the value of all goods produced by the American economy. Sure enough, the line is now moving upward; however, GDP growth by itself doesn’t mean that the economy is healing or that the stimulus worked. The dotted line on the graph traces potential long-term GDP, which is the estimated value of the goods that would be produced if available labor and capital were put to good use. When the economy is healthy, GDP roughly overlaps potential GDP. But when GDP is well below potential, then workers are unemployed, factories stand idle, money sits in bank vaults instead of being invested, and society permanently loses valuable goods that would improve living standards. That is the economy we have now. The United States is not in recession—that is, GDP is not shrinking—but GDP is also not moving back toward potential GDP either. This is different from previous U.S. recessions, where GDP steadily closed the “potential gap” once it began growing again.[5] Our economy is like a sick child whose fever isn’t going higher, but it also isn’t going down.

Some stimulus supporters concede that it hasn’t fixed the economy. But, they say, that’s only because more stimulus is needed, and ARRA’s $800 billion size was too small compared to the depth of the recession.[6] But ARRA wasn’t the only, or even the largest, stimulus measure adopted by Congress. Since 2008, the federal government has passed at least 15 stimulus bills totaling nearly $2.5 trillion.[7] Other stimulus provisions that were slipped into unrelated legislation bring that total to $4 trillion.[8] And the Federal Reserve has pumped in trillions of dollars more. That’s an awful lot of stimulus.

And that leaves us with a tough question for stimulus supporters: If all that money isn’t enough, then is stimulus practically impossible?