Economics

A Hard Pill to Swallow

Is the stimulus turning the economy around?

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In August, Christina Romer, chairwoman of the White House Counsel of Economic Advisers, suggested that we think of the $787 billion American Recovery and Reinvestment Act as an extremely expensive course of antibiotics. "Suppose you go to your doctor for a strep throat," Romer said in a speech to the Economic Club of Washington, "and he or she prescribes an antibiotic." If your fever goes up after you take the first pill, just as unemployment rose after the stimulus bill was enacted, that doesn't mean "the medicine is useless," Romer noted. It could simply be that "the illness was more serious than you and the doctor thought."

But it's also possible that your sore throat and fever are caused by a virus, not a bacterium, in which case the antibiotic will not help. Eventually, though, you will recover on your own, and you may mistakenly conclude that your doctor's prescription did the trick.

Such erroneous causal inferences are always a hazard when it comes to government spending aimed at alleviating a recession. Even if most or all of the money is disbursed after the recession has ended (which is typically the case), stimulus advocates can say the recovery would have been weaker without the spending. Since there's no readily available parallel universe in which to test that counterfactual hypothesis, it can never be conclusively disproved.

Still, Romer seemed unreasonably sure that Dr. Obama's medicine was already kicking in. Although she conceded that "the evidence from the path of the economy over time can't settle the issue of what the effects of the Recovery Act have been," her answer to the question posed in the title of her speech—"Is It Working?"—was "absolutely."

I guess that depends on how you define "working." No doubt spending billions of dollars in borrowed money has some impact on the economy. But the idea that the stimulus package had much to do with an incipient recovery that may have begun in June is belied by a couple of inconvenient facts.

First, since World War II the length of recessions has ranged from six to 16 months, with an average of 10. The current recession officially began in December 2007, so a recovery by the second half of 2009 is what you would expect.

Second, according to ProPublica, only $73 billion of the $580 billion in stimulus spending had been disbursed at the time of Romer's speech. Another $37 billion or so had gone out in the form of tax cuts.

Romer conceded the latter portion of the stimulus did not seem to be very stimulating. She said "consumption fell slightly in the second quarter after rising slightly in the first quarter," which "could be a sign that households are initially using the tax cut mainly to increase their saving and pay off debt."

Is it plausible to suggest that $73 billion in stimulus spending over five months had a decisive impact on a $14 trillion economy? I say "decisive" because President Barack Obama, back in February, presented the stimulus package as the only alternative to a never-ending recession, and in August he claimed, "We've rescued our economy from catastrophe."

Even if we accept the Obama administration's numbers, taxpayers do not seem to be getting much employment bang for their buck. Romer estimated that "employment is now about 485,000 jobs above what it otherwise would have been." That comes out to more than $200,000 per job, which seems pretty pricey, especially since many of these jobs are temporary.

Here is where the "reinvestment" part comes into play. Administration officials say the stimulus package is all about putting Americans back to work. When asked whether this is an efficient way to do that, they claim all the work needs to be done anyway. Conversely, when asked whether all the projects are really worth the money spent on them, they cite jobs "created or saved" as a backup justification. Stimulus means never having to admit you're wasting money.

Senior Editor Jacob Sullum (jsullum@reason.com) is a syndicated columnist.

© Copyright 2009 by Creators Syndicate Inc.

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  1. Episiarch is going to be so pleased by that picture.

  2. ProL, I think he’s there right now.

    1. I thought it was a poetry club and asked them to help me straighten out my Longfellow. Imagine my surprise. Especially since I really shouldn’t be there during work.

      1. Hey, what’s on their sign right now?

        1. I suppose an explanation is in order. I don’t know if there’s more than one, but the Lusty Lady is a Seattle landmark. It’s located near the Pike Place Market and is known for having funny messages on its marquee.

          I’m only familiar with it from walking/driving by it; however, I believe that Episiarch can describe the interior in some detail.

          Episiarch?

        2. I will walk past it on my way home from work and report back. You just can’t beat this level of investigative journalism.

          1. I love the Internet. Here I am, in Tampa, about to get a live, personal account of a peepshow outlet in Seattle, a city about as far away from here as you can get in the continental U.S.

            I love technology. Someday, I’ll get the same service for a peepshow outlet located on Titan. Or, if I’m truly blessed, on the fourth planet of the Canopus system.

            1. I’d go check on the Lusty Lady for you but 10 blocks is too far to walk in the rain.

            2. Drumroll please…

              We have “No tricks just treats” and “We forgot our costumes.” Seasonal.

              And isildur, you’re a candyass. It’s not even raining.

      2. Hey sweetheart, what’s your major?

  3. What’s the term used to describe repeating the mistakes from the past?

    The Cash for Clunkers did so well that GMAC needs another several billion to stop from going under, the first time home buyers credit is a fraud ridden nightmare that has prevented the housing market from stabilizing, and the stimulus hasn’t come close to bringing back the jobs that were anticipated. The level of debt that the federal budget has now taken on will become so large that the interest payments on it alone will soon become half of the overall federal expenditures.

    Good thing we aren’t planning to taking on any more big spending proposals like Health Care reform or Cap and trade, right?

    1. What’s the term used to describe repeating the mistakes from the past?

      Politics?

      1. Indeed.

  4. Here’s a good way to stim the economy:

    1. ignore unemployed Americans living under bridges.
    2. ???
    3. Profit!

    Who knew that Reason and CAP would have so much in common.

    1. Since when it is the government’s duty to make sure that unemployed Americans living under bridges have jobs?

      If you don’t have a job, you might well deserve to not have a job. Otherwise, grow a pair and go make some money.

      1. James, I know it’s tempting to be smug when you are in the ivory tower (not that Purdue is tier 1 ivory), but that won;t get you a job in the real world.

  5. Shut the fuck up, LoneWacko.

  6. Of course borrowing money from China and spending it here will boost the economy. This is obvious and self-evident. You are wasting time even pondering the question.

    You should instead be worried about whether we are getting good value on the dollars we are spending. The answer is generally “yes”, because not only is everything selling at bargain prices, but also, unlike times of full employment, anything the government buys from American workers largely means one less person on the dole. Between the 20% off sales and the effects of turning construction workers from welfare recipients to taxpayers, the government is probably buying bridges and roads at less than 50% of the cost of what it was paying three years ago.

    1. “the government is probably buying bridges and roads at less than 50% of the cost of what it was paying three years ago.”

      If you think the cost of iron and concrete (and labor), has been halvedyou are sorely mistaken.

      1. Bids are coming in much lower than in 2006/7, around 20%. This is both due to lower material costs and lower labor costs. Most of the savings, however, arise from the fact that the government gets 20% of whatever it pays back as taxes, and it no longer needs to pay unemployment, Medicaid, etc.

        1. That doesn’t add up to 50%, bucko.

          1. In 2006:

            Construction worker costs, per week:

            $1000 wages
            $400 benefits
            -$200 taxes

            Net $1200/week

            Today:

            $800 wages
            $400 benefits
            -$150 taxes
            -$375 no need for unemployment benefit
            -$75 no need for COBRA subsidy

            Net: $600

        2. So where does the government get all this money? You make it sound as though it’s the government that is doing the borrowing from China. The government is you and me and every other taxpayer. The government isn’t creating any wealth, it just redistributes the tax money it takes from the taxpayers.

          The idea that the government “gets back” anything is one of the dumber things I’ve seen you write here at Reason. And that is saying something.

          1. “The government is you and me and every other taxpayer. The government isn’t creating any wealth, it just redistributes the tax money it takes from the taxpayers.”

            Exactly. When the government spends money, sooner or later, the individual is going to be picking up the tab.

            The government also no incentive to be efficient. Since government programs aren’t required to draw a profit, they don’t even bother trying and just siphon off my tax dollars from the American people to pay for everything.

            Thus, almost every government program becomes a huge financial sinkhole that no one wants to get rid of. Example: social security, medicaid, medicare, welfare, etc etc etc.

    2. Of course borrowing money from China and spending it here will boost the economy. This is obvious and self-evident.

      And when we pay the debt off? How will that affect the economy?

      anything the government buys from American workers largely means one less person on the dole.

      Taking tax money from employed Americans, so they can’t spend it to keep businesses open, and from employers, so they can’t use it to pay workers, results in higher employment how, again?

      1. Paying off debts (to external creditors) is bad your economy. We should have been doing that when the economy was overheated and could afford to take the hit.

        It isn’t rocket-science, RC.

        When times are good – save.

        When times are bad – dip into the piggy bank.

        The problem is not that we are trying to deficit spend now…it is that we spent like drunken sailors when times were good and don’t have anything stocked away.

        1. RC wasn’t suggesting we pay off the debts now. He was asking what happens when we borrow all that money and our kids and grand kids are paying 60% of their income to pay off the national debt.

          And since when is paying off debt bad for the economy? How are you supposed to “save” money when times are good if you have debt to pay off?

          Believe it or not, the economy would get along just fine without government spending.

          1. Uhh, you save more in the good times than you spend in the bad. Again, the problem is what we have been doing most of the last 30 years, which is deficit spending when the economy was fine. THIS is what is bleeping our grandkids! Actually, I am young enough to be in the first generation to get really screwed by this, btw.

            1. Chad,
              Let me spell it out for you. In order to save for a rainy day, you must first actually have a surplus.

              30 years of deficit spending didn’t screw our grand kids because after Clinton left office, there was a surplus.

              1. I agree. It has been our behavior over the last few decades that have been the problem – not short-term deficit spending when we really need it, but rather persistent deficit spending when we don’t.

                And see my note below. There were a whopping TWO MONTHS where income exceeded outlays. This, of course, were at the height of the .com bubble, when a blind monkey could have balanced the budget.

                1. The idea that government can even concieve of reducing payments without serious impetus from taxpayers is ludicrous. How else do you expect them to buy votes? Keynes himself, the progenitor of this idea, declared toward the end of his life that he was no longer a Keynesian because he recognized this fact.

        2. When times are bad – dip into the piggy bank.

          Except borrowing for stimulus spending is more like running up the credit cards.

          1. At that point, you’ve already smashed your piggy bank and you’re heading to your sister’s room with a hammer to smash hers.

            Everyone knows that’s a big no-no when mom and dad find out. That invisible hand will beat your ass black and blue.

            1. M-o-o-o-o-m! Chad’s being a Keynesian tool again!

          2. Which can be a perfectly rational thing to do when times are bad. Again, the problem is NOT SAVING when times are good. You can thank Republicans for that.

            1. Agreed about the Republicans. Expanding the government costs money.

              But I think you can also think the terrorists for much of the national debt.

              While Clinton was president, I believe there was actually a surplus. You can’t do much about having to fight a war.

              Regardless, it happened, there is a national debt, and Obama’s stimulus plan is more deficit spending on top of an already huge deficit.

              Spending more never has and never will get a country out of debt. This is because when governments spend money, there is never a return.

              1. There was a budget surplus. Let’s not forget that much of it was accoutning slight of hand that took FICA taxes out of (snicker) lockbox and stuck them in the general fund. You know, the kind of stuff that got Arthur Anderson defrocked.

                We were (and are) still in debt to the eyeballs of the residents of Alpa Centauri 5.

              2. Actually, there was never a real surplus under Clinton. The national debt went up every year of his administration (though there were two *months* in 2000 were it went down). The “surpluses” were due to accounting trickery with Social Security, which has been the norm for decades. Just take a look at our published decifit numbers over the years. Then ask yourself why the *debt* increases by ~$200 billion more than the purported defecit for that year.

                That being said, Clinton did a far better job than any Republican has since Gerald Ford in terms of at least approximately matching revenues and spending.

                And you are utterly and absurdly wrong in your final sentence. Are you seriously arguing that schools and roads have no return on investment?

            2. Democrat’s don’t save money in the good times. Their grand idea is to increase taxes and increase spending. The “savings” from the increased taxes are dubious as they depress econoic activity.

              Republicans share the blame, but the available alternative is worse.

              1. During the good times, the Democrats see the increased revenue and pretend it will always be there (or even increase!). They then go on an orgy of spending which creates huge deficits when all that revenue disappears. (See California)

            3. Actually, I watched the news a lot during the early Bush years, and that was hardly the times of plenty. Democrats were going on television calling the 9/11, Dot Com burst recovery “the slowest since Hoover.” Democrats were the ones making it seem like the economy was absolute shit well until 2006/2007. It was only then that they began to concede that the economy was actually on track again (although they still argued it was shit)and the deficit actually shrank for a couple of years. Now everybody wants to argue that 03-07 were the BOOM years and Bush was just wasting money the whole time. I call bullshit.

      2. You obviously don’t get it, RC.

        Money that you and I have, that we would normally spend or invest, creating jobs and wealth in a non-artificial manner either way, needs to be taken and used to build road and bridges at a discount, whether we need them or not, so that unemployed MBAs and and PhD grads can get jobs laying asphalt.

    3. “Of course borrowing money from China and spending it here will boost the economy. This is obvious and self-evident. You are wasting time even pondering the question. ”

      This is of course, still government spending. If companies were borrowing money and using it as capital to expand their business, hire new employees, and ideally make a profit, then it would be useful.

      Good value from spent dollars would come from making a profit off the investment of those dollars.

      Yes, prices are cheap, but many of them are being artificially kept that way by our friend the Federal government.

      Believe it or not, some of the roads don’t need to be repaved.

    4. That’s hilarious. You’re like a priest in a dead religion. “Look, I’m telling you if we don’t sacrifice to Apollo, he won’t bring the sun out. C’mon guys, I’m super serious.”

      1. You are aware that it’s laissez-faire dogmatists who ought to be hanging their heads in shame in light of recent economic events, aren’t you? Greenspan was man enough to admit it rather than invent a self-justifying alternate reality.

        1. Shut the fuck up.

  7. I took a shit in the Lusty Lady once.

    1. You space docked?

  8. It is my understanding that most of the “stimulus” money is not to be spent until some months and years down the line. Basically, the only way that government can effect the economy is by either not doing anything or doing less (less tax, less regulation and so on). Spending by the government does little or nothing. In fact, it often makes the problem worse. Look at the depression of the 30’s. The rest of the world was out of it in a few years. But thanks to the efforts of FDR, the US did not get back on track until after WWII. If he had done nothing, we would have had restoration of the economy in the 30’s. Plus, he helped Hitler kill Jews by not giving them sanctuary as he was concerned as the effect they would have on the money flow in the US.

    I would say that our problem is still present and not by any means rectified. In fact, The Great One is likely drawing down our efforts by maintaining a high tax posture, insisting on managing everything, health care reform and cap and trade. In fact, just about everything he is doing is having a adverse effect that will ultimately be felt. I he doing it on purpose?

    1. Obama is far less interested in a health economy than he is in a Total State under Party control.

      Eggs, meet omelette.

      1. Are you trying to be funny or are you really this kooky?

        1. Tony,
          You have one of two choices in assessing Obama’s preformance to date. First, either he is extremely stupid and does not understand how to work with the economy. Or, he is extremely cleaver with a plan to dismantle the basic structure of the US. Considering his actions and those people he has about him for help, the second is a distinct possiblity.

  9. You know, there’s a reason most economists are liberal economists and not Marxists or Keynesian. ‘Cause the latter two are stupid economic theories.

    1. Paul Krugman did not receive your memo.

      1. You mean Nobel Prize and Oscar? winner Paul Krugman?

  10. I’m sure Krugman’s done as much for economics as Obama has for peace.

    1. Predator drones for Peace!!

    2. Actually, Krugman’s work on International Trade was very impressive and, in balance, makes the case for free trade. But to me, this proves he is the “rain man” of the economic profession – able to see something (the value of free exchange and markets) in one situation and totally unable to extend that lesson to any other situation that would contradict the progressive dogma

  11. How many times are you gonna use that picture?

  12. C’mon, Sullum, admit it. You hope the stimulus doesn’t work, and you’ll manage to find “evidence” that it hasn’t. Hey, it’s a job.

  13. You hope the stimulus doesn’t work…

    Hoping the stimulus doesn’t work is like ‘hoping’ gravity does work. Taking wealth from those who create it and giving it to those who destroy it is not a way to create wealth. You figure that should be obvious to even sub-morons, but Leftitti / Edweirdo / Morris obviously still can’t grasp it.

    Here’s a clue Eddie, give $200 to a local drunk as a stimulus. He’ll spend it at the liquor store, creating (or saving) liquor store and distillery jobs. After he gets drunk, maybe he’ll get in a fight, creating more jobs for the police and EMTs, or smash a window, creating jobs for the police and the Anderson glass people. Go on, Ed, it for the country…

    1. I really don’t think you understand the economic basis for fiscal or monetary stimulus at all.

      1. I don’t think you understand sarcasm.

      2. No, that was just about it.

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  16. Actually, I watched the news a lot during the early Bush years, and that was hardly the times of plenty. Democrats were going on television calling the 9/11, Dot Com burst recovery “the slowest since Hoover.” Democrats were the ones making it seem like the economy was absolute shit well until 2006/2007. It was only then that they began to concede that the economy was actually on track again (although they still argued it was shit)and the deficit actually shrank for a couple of years. Now everybody wants to argue that 03-07 were the BOOM years and Bush was just wasting money the whole time. I call bullshit.

  17. Dear Brothers and Sisters, Sons and Daughters of Liberty,

    There are only two types of human beings.

    One type just wants everyone to leave everyone else alone and these humans are students and advocates of the Philosophically Mature Non-Aggression Principle.

    The other type refuses to leave others alone and these humans are the Mobocracy Looter Minions with their hords of bureaucrats, jackboots, and mercenaries that perpetuate the perpetration of the loot and booty gravy-train. Rob-peter-to-buy-paul’s-vote bread and circuses of the doomed Amerikan Empire.

    You are either the one…or the other.

    The John Galt Solution of Starving The Monkeys is the only solution. Stop funding and forging your own chains and shackles. What are you leaving for your children and grandchildren and prodigy!?!

    The Mobocracy Looter Minions must be allowed to consume everything around them, then each other, and finally themselves. There is no other way. Ayn Rand wrote about it over fifty years ago and it rings as soundly today as it did then.

    Get your copy of Starving The Monkeys by Tom Baugh today, before the book is banned and the author is hunted down and Vince Fostered!

    Sincerely,
    John and Dagny Galt
    Atlas Shrugged, Owner’s Manual For The Universe!(tm)

    http://www.starvingthemonkeys.com/

    http://voluntaryist.com/fundam…..uction.php

    .

  18. My only point is that if you take the Bible straight, as I’m sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won’t get the full deal by just doing regular skill english reading for those books. In other words, there’s more to the books of the Bible than most will ever grasp. I’m not concerned that Mr. Crumb will go to hell or anything crazy like that! It’s just that he, like many types of religionists, seems to take it literally, take it straight…the Bible’s books were not written by straight laced divinity students in 3 piece suits who white wash religious beliefs as if God made them with clothes on…the Bible’s books were written by people with very different mindsets…

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