Judging Stimulus by Job Data Reveals Success
Imagine if, one year ago, Congress had passed a stimulus bill that really worked.
Let's say this bill had started spending money within a matter of weeks and had rapidly helped the economy. Let's also imagine it was large enough to have had a huge impact on jobs - employing something like two million people who would otherwise be unemployed right now.
If that had happened, what would the economy look like today?
Well, it would look almost exactly as it does now. Because those nice descriptions of the stimulus that I just gave aren't hypothetical. They are descriptions of the actual bill.
Just look at the outside evaluations of the stimulus. Perhaps the best-known economic research firms are IHS Global Insight, Macroeconomic Advisers and Moody's Economy.com. They all estimate that the bill has added 1.6 million to 1.8 million jobs so far and that its ultimate impact will be roughly 2.5 million jobs. The Congressional Budget Office, an independent agency, considers these estimates to be conservative.
Yet I'm guessing you don't think of the stimulus bill as a big success. You've read columns (by me, for example) complaining that it should have spent money more quickly. Or you've heard about the phantom ZIP code scandal: the fact that a government Web site mistakenly reported money being spent in nonexistent ZIP codes.
And many of the criticisms are valid. The program has had its flaws. But the attention they have received is wildly disproportionate to their importance. To hark back to another big government program, it's almost as if the lasting image of the lunar space program was Apollo 6, an unmanned 1968 mission that had engine problems, and not Apollo 11, the moon landing.
The reasons for the stimulus's middling popularity aren't a mystery. The unemployment rate remains near 10 percent, and many families are struggling. Saying that things could have been even worse doesn't exactly inspire. Liberals don't like the stimulus because they wish it were bigger. Republicans don't like it because it's a Democratic program. The Obama administration hurt the bill's popularity by making too rosy an economic forecast upon taking office.
Moreover, the introduction of the most visible parts of the program - spending on roads, buildings and the like - has been a bit sluggish. Aid to states, unemployment benefits and some tax provisions have been more successful and account for far more of the bill. But their successes are not obvious.
Even if the conventional wisdom is understandable, however, it has consequences. Because the economy is still a long way from being healthy, members of Congress are now debating another, smaller stimulus bill. (They're calling it a "jobs bill," seeing stimulus as a dirty word.) The logical thing to do would be to examine what worked and what didn't in last year's bill.
But that's not what is happening. Instead, the debate is largely disconnected from the huge stimulus experiment we just ran. Why? As Senator Scott Brown of Massachusetts, the newest member of Congress, said, in a nice summary of the misperceptions, the stimulus might have saved some jobs, but it "didn't create one new job."
The case against the stimulus revolves around the idea that the economy would be no worse off without it. As a Wall Street Journal opinion piece put it last year, "The resilience of the private sector following the fall 2008 panic - not the fiscal stimulus program - deserves the lion's share of the credit for the impressive growth improvement." In a touch of unintended irony, two of article's three authors were listed as working at a research institution named for Herbert Hoover.
Of course, no one can be certain about what would have happened in an alternate universe without a $787 billion stimulus. But there are two main reasons to think the hard-core skeptics are misguided - above and beyond those complicated, independent economic analyses.
The first is the basic narrative that the data offer. Pick just about any area of the economy and you come across the stimulus bill's footprints.
In the early months of last year, spending by state and local governments was falling rapidly, as was tax revenue. In the spring, tax revenue continued to drop, yet spending jumped - during the very time when state and local officials were finding out roughly how much stimulus money they would be receiving. This is the money that has kept teachers, police officers, health care workers and firefighters employed.
Then there is corporate spending. It surged in the final months of last year. Mark Zandi of Economy.com (who has advised the McCain campaign and Congressional Democrats) says that the Dec. 31 expiration of a tax credit for corporate investment, which was part of the stimulus, is a big reason.
The story isn't quite as clear-cut with consumer spending, as skeptics note. Its sharp plunge stopped before President Obama signed the stimulus into law exactly one year ago. But the billions of dollars in tax cuts, food stamps and jobless benefits in the stimulus have still made a difference. Since February, aggregate wages and salaries have fallen, while consumer spending has risen. The difference between the two - some $100 billion - has essentially come from stimulus checks.
The second argument in the bill's favor is the history of financial crises. They have wreaked terrible damage on economies. Indeed, the damage tended to be even worse than what we have suffered.
Around the world over the last century, the typical financial crisis caused the jobless rate to rise for almost five years, according to work by the economists Carmen Reinhart and Kenneth Rogoff. On that timeline, our rate would still be rising in early 2012. Even that may be optimistic, given that the recent crisis was so bad. As Ben Bernanke, Henry Paulson (Republicans both) and many others warned in 2008, this recession had the potential to become a depression.
Yet the jobless rate is now expected to begin falling consistently by the end of this year.
For that, the stimulus package, flaws and all, deserves a big heaping of credit. "It prevented things from getting much worse than they otherwise would have been," Nariman Behravesh, Global Insight's chief economist, says. "I think everyone would have to acknowledge that's a good thing."
So what now?
The last year has shown - just as economists have long said - that aid to states and cities may be the single most effective form of stimulus. Unlike road- or bridge-building, it can happen in a matter of weeks. And unlike tax cuts, state and local aid never languishes in a household's savings account.
The ideal follow-up stimulus would start with that aid. It would then add on extended jobless benefits, which also tend to be spent, as well as tax credits carefully drafted to get businesses to hire and households to spend, like the cash-for-clunkers program.
By this yardstick, the $154 billion bill that the House passed in December is decent. It includes $27 billion in state and local aid, $79 billion for jobless benefits and other safety nets, and $48 billion in infrastructure spending.
The smaller bills being considered by the Senate are worse. They may end up with no state aid at all, and their tax credits sound better - with promises to help the long-term unemployed and small businesses - than they are. "The economic impact of the Senate bill, at this point, is starting to look very small," Mr. Behravesh says.
Given what people have been saying about a successful stimulus bill, just imagine what they'll say about one that doesn't accomplish much.