Did The Stimulus Work?

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This week, I want to share some papers that relate to a controversial topic…whether the stimulus plan worked.  Of course, this is an impossible question to answer – we have no idea what the world would look like if the government didn’t take action. (Please note: the three charts in this blog come from the two papers that I am reviewing.)


Jason Saving, a senior economist at the Dallas Fed, wrote a short article called, “Can the Nation Stimulate Its Way to Prosperity?” Here is the link. In the article, Saving made the following points:

1. In normal times, economic policy tries to maximize growth over the long run by encouraging saving and investment.  Fiscal stimulus, on the other hand, tries to increase spending in the short-term to provide a jolt to the economy.  The hope is that the economy will recover and we can handle the debt from the excess spending.




2. Stimulus can help maintain spending when banks aren’t lending.




3. Outlays from financial stimulus can be divided into three categories: direct spending, discretionary spending and tax cuts.  Direct spending was largely comprised of Medicaid and unemployment insurance payments.  Discretionary spending went to federal agencies to fund projects such as roads and schools.  Tax cuts were used for the Making Work Pay credit ($800 for some couples) and a one-year patch to stop people from being subject to the AMT (alternative minimum tax). 
    




4. The best way to boost consumption in the short-term is to put money in the hands of those who are least likely to save it. This means giving money to the poor and unemployed.




5. Research on the multiplier effect indicates that we get the highest multiplier effect from unemployment insurance extensions, then tax breaks and budgetary aid to states.  Far behind are more generous depreciation provisions and the extension of the AMT patch.
   




6. In order to be successful, stimulus must also be timely. Approximately 1/3 was spent in 2009, 40% in 2010 and 25% in 2011 – 2019.  In other words, some was timely and some will not be.




7. It is impossible to know with certainty how many jobs were saved or how much growth was created by the stimulus because we don’t know what would have happened if we didn’t do this.




8. The only thing we can be certain of is that the stimulus has caused a huge increase in our budget deficit.  The fear is that private-sector borrowing may be crowded out in the future and the tax burden is likely to grow.

For a different view, you can read “How the Great Recession Was Brought to an End” by Alan S. Blinder (Princeton professor and former Fed governor) and Mark Zandi (Chief Economist, Moody’s).  Here’s the link. They take a broader perspective, looking at fiscal policy, monetary policy and other actions by the Fed.


Blinder and Zandi point out that the government had two goals: (1) to stabilize the financial system; and (2) to mitigate the recession.  They conclude that the government helped to avert a depression.  Without the government’s response, they believe that GDP would have been 11.5% lower, we would have lost 8.5 million more jobs and we would be experiencing deflation.


They conclude that financial market policies (TARP, bank stress tests, quantitative easing, etc.) had a much larger impact than the stimulus.  With that said, they still believe that the stimulus had a substantial impact – raising 2010 real GDP by 3.4% and adding 2.7 million jobs.  The authors state that “the stimulus has done what it was supposed to do: end the Great Recession and spur recovery.”


They also make clear that there are plenty of things we could argue about:


It is also not difficult to find fault with isolated aspects of the policy response. Were the bank and auto industry bailouts really necessary? Do extra UI ben­efits encourage the unemployed not to seek work? Should not bloated state and local governments be forced to cut wasteful bud­gets? Was the housing tax credit a giveaway to buyers who would have bought homes anyway? Are the foreclosure mitigation ef­forts the best that could have been done? The questions go on and on.


While all of these questions deserve care­ful consideration, it is clear that laissez faire was not an option; policymakers had to act. Not responding would have left both the economy and the government’s fiscal situ­ation in far graver condition. We conclude that Ben Bernanke was probably right when he said that “We came very close in October [2008] to Depression 2.0.”


While we can all disagree with the various policies (and I certainly disagree with some), I would recommend this paper to you because it has a great summary of many of the programs that were implemented.


Here are my conclusions from my reading of these papers:

1. The extent of the government’s actions was incredible.  Blinder and Zandi’s first exhibit (see below) really makes this point.
   




2. While we could argue about whether the government was to blame for many of the problems that they were solving, I would agree that the “non-fiscal stimulus” policies prevented a financial collapse.  While many of the programs are unappealing (TARP, AIG, Fannie and Freddie, etc.), the situation would have been much worse (and probably would have cost us much more) if the government had not acted.




3. I have mixed feelings on the stimulus program.  Our nation wanted a stimulus bill and the bill helped to alleviate panic.  Of course, we made a lot of decisions really quickly with respect to spending.  I am particularly opposed to programs that helped particular industries (such as Cash for Clunkers).




4. Much of what we did was simply a wealth transfer to bank shareholders.  I’m really tired of hearing that we’re not going to lose much money in TARP.  In my opinion, the Fed’s purchase of MBS and Treasuries (and their announcement that they would be buying them) ensured the profitability of many banks.  It’s interesting to see the trading profits of the banks during this time period – it would seem to lead to the conclusion that profitability increased with low interest rates and with knowledge of what the Fed would be buying.




5. I disagree with Blinder and Zandi’s conclusion that the stimulus program helped to end the recession and spur recovery.  My fundamental disagreement is that I don’t like to say that we’re out of recession.  If we have positive economic growth that results from government stimulus but can’t create jobs and growth isn’t sustainable on its own, can the recession really be over?  Why are we talking about the possibility of a double-dip recession – it seems to me that this is simply one long recession (and it’s not done)?




6. The debt that resulted from this recession will be just one small piece of the debt crisis which will eventually emerge in the long-term.

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