Jonathan Chait

Can You Measure The Stimulus?


In January of 2009, the Council of Economic Advisers released an economic projection predicting unemployment with or without the stimulus:

Of course, unemployment has risen even higher than the chart's worst case scenario. This fact has been cited by, well, pretty much every single Republican and/or member of the conservative movement as proof that the stimulus failed. What it actually shows is that the economy was in much worse shape than the government realized in January of 2009, though some economists predicted that the administration's forecast was too optimistic. See Paul Krugman the day the report came out:

the estimate of what would happen to the economy in the absence of a stimulus plan seems kind of optimistic. The chart above has unemployment ex-stimulus peaking at 9 percent in the first quarter of 2010 and coming down through the year; the CBO estimates an average unemployment rate of 9 percent for 2010, so the Obama people are more optimistic than the CBO, and a lot more optimistic than I am.

Anyway, former Bush economic adviser Larry Lindsey is at least honest enough to concede, backhandedly, that this prediction does not actually prove that the stimulus failed. Lindsey recognizes that the predictions against which the stimulus was measured were probably too sunny. So he proposes measuring it against alternative predictions:

The Romer-Bernstein paper has often been cited as saying that if the package passed, the unemployment rate would peak below 8 percent in the middle of 2009 and would decline to below 7.5 percent by now. Obviously this has not happened. The administration, along with Blinder and Zandi, argue that it is not fair to conclude that this proves the package was a failure since Romer and Bern-stein underestimated the severity of the recession and that unemployment was already 8.2 percent in the first quarter of 2009, higher than the assumed peak.

I am sympathetic to their argument and Chart 1 corrects for their complaint by raising their estimate of where unemployment started in their experiment. The lowest line provides the original estimate of the path of unemployment provided by Romer and Bernstein on January 9, 2009. The second line replicates the Romer and Bernstein path, but raises the initial unemployment rate from their assumed 7.5 percent to 8.2 percent. This was the actual average of the unemployment rate in the first quarter of 2009, the period in which the stimulus was passed. The third line provides a more extreme alternative by raising the initial unemployment rate to the 9.3 percent average of the second quarter 2009. The first modification fully compensates for their objection while the second modification more than compensates for their concern.

So Lindsey proposes to measure the stimulus against alternatives in which unemployment would have risen to either 8.2% or 9.3%. Are these fair baselines? No, they're not. By the time the stimulus had passed, economic forecasts had darkened considerably. In March of 2009, the OECD predicted that unemployment in the U.S. would reach 10.3% in 2010. CBO predicted that, with the stimulus, unemployment would top out at 9.4%, which is almost exactly what happened. Lindsey is making a more honest case than his fellow Republicans, but still not an honest case.

The truth is that you can't prove whether the stimulus worked or not. You can try to reconstruct the effects of the stimulus (and other government interventions) as Alan Blinder and Mark Zandi did. But you're still making assumptions on the basis of economic models -- mainstream assumptions shared by most economists, but assumptions nonetheless. Actually proving the case would require going back to 2009 and re-running history with everything the same but no stimulus. Since we can't do that, all we can do is guess.

Of course, Republicans aren't making a good faith effort to gauge the effects of the stimulus. They're simply looking for a pseudo-economic argument that allows them to blame Obama for everything that has happened since the economic crisis of 2008. Lindsey's article is a rationalization for that political strategy.

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