Looking Back at the Successes (and Failures) of the Stimulus

There has been a lot of discussion lately about the fifth anniversary of the American Recovery and Reinvestment Act.

My quick verdict remains the same as it was from the beginning: this was a plan that did considerable economic good, but also considerable political harm.

The economic good was straightforward: everything we have seen since 2009 confirms that expansionary fiscal policy is expansionary, and that contractionary fiscal policy is contractionary. There is every reason to believe that the Recovery Act boosted gross domestic product and employment while it was in effect relative to what would have happened without it.

The political harm came mainly from the fact that the Recovery Act was too small and too short-lived to do the job, but partly also from a serious mistake in the way the Obama administration sold it.

There’s a widespread canard against those of us who said that the Recovery Act was too small – namely, that we were only making excuses after the fact. No, we weren’t: people like the economist Joe Stiglitz and I warned right from the beginning that it was way too small, and that there would be serious political damage as a result. On Jan. 6, 2009, I wrote: “I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says, ‘See, government spending doesn’t work.’ Let’s hope I’ve got this wrong.”

Alas, I wasn’t wrong.

You can argue that there was no way the administration could have gotten a bigger plan. Actually, they could have used reconciliation to bypass the 60-vote hurdle in the Senate, but that was considered too radical. And why was it considered too radical? I’d argue that it was in part because the administration had the wrong theory about the recession, which also wreaked havoc with the selling of the plan.

The notorious forecast of the Recovery Act’s impact that was prepared by the economists Christina Romer and Jared Bernstein is notorious because it predicted a quick return to full employment, which didn’t happen. But it didn’t say that this quick recovery would happen because of the stimulus – in fact, it predicted a quick recovery even without the stimulus. The Recovery Act’s role was limited to shaving off the peak in unemployment, then getting out of the way as a natural bounce back took hold.

So underlying that forecast was the view that the economy would come roaring back once the financial crisis had been stabilized.

This was not plausible to those who knew history – not just the history of financial crises, but the history of the post-1990 business cycle in the United States. Worse, the Obama administration clearly failed to consider the political consequences if the quick-recovery view proved wrong.

All of this is water long under the bridge. But it’s probably worth reminding ourselves about why some of us were tearing our hair out in early 2009.