Did the Stimulus Stimulate?
The Obama team gives macroeconomics a bad name.
Aug 16, 2010, Vol. 15, No. 45 • By LAWRENCE B. LINDSEY
There are ample reasons for this lack of success. National Economic Council chairman Larry Summers argued that stimulus should be “timely, targeted, and temporary.” But the package that passed was neither timely nor targeted and today Congress is faced with making many of the stimulus programs permanent because unemployment remains stubbornly high.
The bill was not timely because the bulk of the funds were disbursed through the cumbersome government contracting process—and often made doubly complicated because the funds were then channeled through state and local governments. Weekly data collected in 2009 (since discontinued) showed a very consistent $7 billion of stimulus disbursed every week starting in the second quarter of 2009. If you are one of the 6.8 million persons unemployed for six months or more, this slow pace of disbursement is anything but timely.
Nor was the bill targeted, at least in any economically sensible way. It was written not by Larry Summers or Christina Romer, but by Democratic members of congressional appropriations committees, based on the normal political logrolling and reward process. This is the group that notoriously brought us “bridges to nowhere” in the past. The bill was, moreover, rushed through without much review or oversight. One may remember that the stimulus bill was the one that authorized the payment of bonuses to AIG executives, a fact not discovered until well after the bill was signed. This was then followed by days of publicly discussed “mystery” about how such a provision was included. Well-designed targeting would not have included such provisions.
From a macroeconomic perspective, a targeted bill would have injected money directly into the cash flow of American households and small businesses where it was needed. Many of us who supported the administration’s call for a stimulus in early 2009 recommended the reduction of the payroll tax for both employers and employees, something with the same net revenue effect as what was passed. Such a payroll tax cut would have provided an incentive at the margin for continued work and employment for more than 90 percent of the labor force. The tax provision in the actual stimulus that passed did so for less than 15 percent of the labor force, and the spending provisions impacted only 2 percent of the labor force even under the administration’s assumptions. That is bad targeting.
The Blinder and Zandi paper did note that a few provisions of the stimulus appeared to be particularly effective at pulling forward economic activity. These were the “Cash for Clunkers” program and the first time homeowners’ tax credit. But both of these programs were enacted separately from the $800 billion American Recovery and Reinvestment Act and together totaled less than $20 billion. How you spend money is as important as how much you spend. Since the beginning of the recession, the number of unemployed has increased by more than 8 million people. For $800 billion, we could have handed every one of these people a check for $100,000—which gives a sense of what was possible with that much money and just how inefficient the actual program was.
It really should be no surprise that the stimulus bill has created far fewer jobs, dollar for dollar, than past stimulus measures. That is why it is methodologically spurious to assert that unemployment is far lower than it would be in its absence. I say that as one whom the administration itself cited as a supporter of a generic stimulus measure back in January 2009. I continue to believe that it would be a mistake to withdraw stimulus from the economy—such as by raising taxes or by letting existing tax provisions expire. This despite the very high deficits we are now experiencing. Our policy problem today is that the bill that was actually passed into law was both so expensive and so badly flawed that it gives the whole concept of macroeconomic stimulus a bad name.
Lawrence B. Lindsey served in the Reagan, George H.W. Bush, and George W. Bush White Houses and at the Federal Reserve during the Clinton administration. His most recent book is What a President Should Know . . . but Most Learn Too Late.