In the wake of the Obama administration’s most recent efforts to pass a stimulus without actually calling it stimulus, The New Yorker’s James Surowiecki wonders why, exactly, “stimulus” has become a dirty word:
This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower. The weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again. What’s more, it did so without any of the negative effects that deficit spending can entail: interest rates remain at remarkably low levels, and government borrowing didn’t crowd out private investment.
But the array of estimates positing that the stimulus created millions of jobs and boosted GDP by some significant amount is hardly clear evidence of success. They’re projections, not, as Surowiecki says, "measures" (reasonable or otherwise). The CBO’s estimates rely on rerunning the same economic models that they ran before the stimulus passed; the quarterly estimates are simply adjusted for how much money has actually been spent—but they’re still projections, not measurements. Wall Street forecasters end up doing much the same thing, too, because in the end, there isn’t a good way to accurately capture and measure the stimulus’ real-world effects. Those models aren’t useless, but they’re hardly compelling evidence.
It’s also a stretch to make an unqualified claim that “government borrowing didn’t crowd out private investment.” That may be true, but again, we don’t really know. The CBO actually warned prior to the passage of the stimulus that the Senate version of the bill that the increase in government debt associated with the stimulus could crowd out private investment, and there’s some research that suggests that government spending usually has that effect. Now, that research isn’t overwhelming either. But it does indicate that economists still don’t have a clear picture of whether and how much stimulus dollars crowd out private spending.
Surowiecki also floats the idea that the stimulus achieved whatever it achieved “without any of the negative effects that deficit spending can entail.” He points to interest rates, which remain low (for now). But he overlooks the way in which it has probably pushed the U.S. closer to a potential fiscal crisis. As Arnold Kling noted recently, it’s impossible to definitively predict if and when we’ll hit a fiscal crisis. But as Kling, the CBO, and the IMF all agree, piling on more debt, as we most certainly did with the stimulus, increases the chances that we'll hit one sooner rather than later—and, on its current debt and deficit path, the country appears to be veering toward the limit of what it can reasonably handle.
Understood in this light, the stimulus’ dismal popularity ratings make more sense. The costs have been clear. The benefits have not. And the administration and its defenders haven’t helped themselves by continuing to claim that the job-creating, GDP-boosting success of the stimulus is a settled fact—when the fact is that it’s anything but.