Stimulus?

After seeing today’s job report from the BLS I have to wonder, is the stimulus working? I’m thinking no. There are two possible explanations as to what is going on here.

  1. The initial forecast for unemployment was too optimistic.
  2. The forecast was fine, but the stimulus is just not doing what it is supposed to do: create jobs.

Why do I believe 2 vs. 1? The idea behind the stimulus package was to create (or save, don’t forget this!) jobs. We were presented a graph of unemployment with and without the stimulus. Right now we are on track for the “no stimulus” scenario. Further, we have evidence that very little stimulus has been spent so far. Further, up until recently the consensus view was that fiscal policy was at best an clumsy tool for stimulating the economy and that multipliers were not significant. So, even if we had stimulus money being spent quickly enough there was some reason to believe it would have only a minor impact. In other words, whatever benefit the small amount of stimulus money actually spent would have is likely smaller than the politically motivated initial claims.

The other explanation is that without the stimulus package and its paltry spending to date we’d be in a situation with unemployment at this point well above the 10% range and probably above 11%, but we aren’t because of the paltry spending by the Obama Administration. I find it somewhat unlikely that spending merely $56 billion would result in unemploymnt being 1% lower.

So based on this I’m going to go with explanation 2. That the stimulus spending is not working. It is not working for the following reasons: the first is that that stimulus money is not being spent fast enough. Second, whatever benefit we are getting from the $56 billion spent so far, it is likely not enough to offset the effects of the recession. These were two criticisms raised by people opposed to the stimulus package. So far, the evidence seems to be in favor of those critical to the stimulus package.

So we are going to waste hundreds of billions of dollars because President Obama implemented a bad policy and was able to make it sound good…a lot like a used car salesman.

Image by Flickr user Joan Thewlis, under the Creative Commons License.

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Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. 2a. Many of us have begun reacting to the deficit spending and uncertainty created by the uncontrolled deficit spending by this Congress and the administration. Ceteris parabis does not apply though their estimates appear to have assumed it. The Stimulus Package, rumors of another Stimulus Package, Cap and Trade passing the fifty yard line, the coming Health Care Power Grab, TARP, etc., and the resultant expectations for inflation, tax increases, and metastasizing regulation have changed the game in ways the all powerful knob-turners and dial-adjusters have not accounted for.

  2. Drew says:

    “a lot like a used care salesman.”

    The typo has a certain charm and truth in it. Just because he “cares” he sold us a bad bill. It’s alot like the “we have to do something” argument. Oh, do we? How about putting a gun to our head and pulling the trigger…..that’s “something.”

    Separately, as an owner in 6 businesses, I cannot overstate how correct Mr. Austin’s observations are.

  3. […] Steve Verdon […]

  4. Dave Schuler says:

    I commented in a similar vein to a column by David Leonhardt in the NYT yesterday, Steve.

    Look at the bright side. There are something like 140 million employed in the civilian labor force. That means 140 million jobs have been saved!

  5. odograph says:

    There are two possible explanations as to what is going on here.

    1) The initial forecast for unemployment was too optimistic.

    2) The forecast was fine, but the stimulus is just not doing what it is supposed to do: create jobs.

    Why do I believe 2 vs. 1?

    LOL, which interpretation most validates your preexisting beliefs, and which gives you the most blog fodder?

    (Missing a counterfactual again.)

  6. odograph says:

    BTW, “the forecast was fine” is numerically impossible. You can’t have worse than “no stimulus” projections “because” the stimulus did not show up “in time.” Sheesh.

  7. odograph says:

    BTW Dave, re. your update on your page … you don’t need to look for nefarious reasons for economic projections to be wrong. They are wrong the vast majority of the time. The few times they are right are consistent with random luck (see Taleb or Tetlock).

    To hang your hat (as Steve has for three or four recycled posts now) on a prediction as if it were an established fact is embarassingly absurd.

  8. Michael says:

    Right now we are on track for the “no stimulus” scenario. Further, we have evidence that very little stimulus has been spent so far.

    So the stimulus money isn’t being spent, and we’re on track for the scenario where stimulus money wasn’t spent. Huh.

    I think the problem is that you are saying that the “plan” didn’t work, not that the “implementation” didn’t work. The problem isn’t that spending isn’t working, it’s that the spending isn’t happening.

    When you say “the stimulus isn’t working”, most people I except will take that to mean the spending isn’t having it’s predicted effect and therefore the plan was bad, not to mean that the plan isn’t being implemented, and thus is having the same effect as having no plan at all.

  9. odograph says:

    So the stimulus money isn’t being spent, and we’re on track for the scenario where stimulus money wasn’t spent. Huh.

    Except that isn’t true. We are now ever further off (in the bad way) the “no stimulus” prediction.

  10. Steve Plunk says:

    Charles has it right. All the stimulus in the world will not offset the fall in consumer and business confidence. Without consumer confidence no one buys the big ticket items and without business confidence no investment in property, plant, and equipment or hiring. As Charles says the rapid move to left has frightened everyone except for government workers and retired professors.

    Businesses see an Administration and Congress that’s bad for them. Time to hunker down and minimize risk. Our system needs that risk taking to advance forward. Heck, even those who might take a risk are going to reap less of the rewards so why bother? Who wants to keep less of the profits and then only be able to buy a GM hybrid instead of a Cadillac?

    Another problem is the continued uncertainty surrounding energy. Is Waxman trying to kill the economy? I think he is. We need to drill for oil, knock off doing the silly green stuff that doesn’t work, expand natural gas infrastructure, and figure out how to make nuclear work for less money. Our new energy policy will handicap the economy for years if not generations.

    Stimulus? These clowns are making things worse.

  11. Steve says:

    There’s no way of knowing if the stimulus is working. It’s not like you have a control universe where you didn’t pass the stimulus and can compare those results with our universe. Yes, the economy is crappy, but maybe it would be worse without the stimulus.

    It’s possible that it’s working, but that it was too small. Many economists were suggesting that that what was passed would not be enough.

  12. Further to Steve’s point… If the Stimulus Package isn’t working maybe it’s because it isn’t really a Stimulus Package at all but a grab bag of all the Christmas wishes the solidly in power Democrats had been accumulating for quite some time wrapped up in shiny Stimulus Package paper and topped with a hopey-changey bow. Remember Larry Summer’s guidelines that to be effective a Stimulus Package has to be timely (epic fail), targeted (epic fail) and temporary (epic fail)? Too bad they aren’t listening to his advice.

    The Stimulus Package as it passed was just a form of graft. You really want to stimulate the economy? Cut taxes and stop creating uncertainty for the future. That’s what is killing the economy more than anything else. And every further application of so-called stimulus is only going to make it worse.

    Oh, as for many economists (read Paul Krugman) saying it was not big enough, reread the above first and then note that this is just another variant of the old saw that socialism only failed every time before because it wasn’t done right, but darn it we’ll do it right this time. As for “maybe it would be worse without the so-called stimulus,” well maybe it would have been better had John McCain had won. Anyone can play that game and it adds nothing to the discussion.

  13. Steve says:

    Never heard anyone call Martin Feldstein a socialist before. He was one of the guys saying the stimulus package wasn’t going to be big enough.

  14. Herb says:

    As Charles says the rapid move to left has frightened everyone except for government workers and retired professors.

    Um… What about all the leftists who actually welcomed and embraced“the rapid move to left?”

    Now before Charles can make some more unfair accusations, let me just say this: Being frightened by “the rapid move to left” is a completely legitimate position.

    However, it did not cause the recession to begin with (as some of the more loony wingers claimed months ago) nor did it cause the stimulus to fail anymore than the NBA playoffs were decided in Game 3.

    The game is not over.

    Example: I was just reading in the newspaper today about how ARRA funds are finally…finally…going to lead to much-needed (and oft-stalled) road construction in Aurora, CO. Work will begin in the fall, so judging its effectiveness two days into July is a bit premature.

    This project has not created a single job…yet.

    Besides, job creation is not the be all, end all. If we wanted to just create jobs, let’s hire a bunch of unemployed people to test out that 100 Monkeys hypothesis. Give em a type writer, some paper, and see how long it takes them to write Romeo and Juliet.

    Creating useful jobs that provide some net benefit to society is the key. And that takes time.

    I can tell you this: In the case of my road example, that work wouldn’t have gotten the greenlight were it not for the ARRA.

  15. I don’t think I called anybody, not even Paul Krugman, a socialist, fond as I may be of making such ungrounded accusations, according to Herb who thinks I called him a racist caller outer or something.

    Herb, I’ll try and let it go if you will.

  16. just me says:

    Further to Steve’s point… If the Stimulus Package isn’t working maybe it’s because it isn’t really a Stimulus Package at all but a grab bag of all the Christmas wishes the solidly in power Democrats had been accumulating for quite some time wrapped up in shiny Stimulus Package paper and topped with a hopey-changey bow. Remember Larry Summer’s guidelines that to be effective a Stimulus Package has to be timely (epic fail), targeted (epic fail) and temporary (epic fail)? Too bad they aren’t listening to his advice.

    This is pretty much what I was going to say, and said much better.

    I think the big problem with the stimulus package is that the vast majority of it wasn’t stimulus-it was pet projects dressed up to be stimulus so it could get passed without any real consideration.

    I was never a fan of the stimulus bill, and I am still not a fan, and the sad thing is i think our country took on all that debt in the name of stimulus and has only made things worse.

  17. odograph says:

    I’m another who would have done the stimulus differently, but I think the economists are measuring positive stimulus impacts (relative to decling base scenario) now.

    Bloomberg:

    Consumer spending rose in May as benefits from the Obama administration’s stimulus plan spurred a jump in American incomes, a sign that efforts to revive the economy are starting to pay off.

    But you know, feel free to “feel” differently.

  18. davod says:

    If the aim is to win in 2010 and 2012 why would you care if the jobs do not kick in until 2010.