Right-Wing Economic Claptrap About the 2009 “Stimulus”

Right-Wing Economic Claptrap About the 2009 “Stimulus”

At one point in Tocqueville’s Recollections, his wonderful book about the 1848 revolution in France and his role in the politics of its aftermath, Tocqueville muses that one of the distressing things about being a politician is that you have to keep saying the same things over and over again. Alas, that seems to be true for pundits and bloggers as well. And one reason why is that one has to keep responding over and over to the same absurd and dishonest propaganda lines, no matter how many times they have been refuted or discredited.

For example, most serious economic analysts agree that the 2009 economic “stimulus” (the American Recovery and Reinvestment Act) helped pull the economy out of its downward spiral and significantly reduce the level of unemployment, which would have been even higher than it is without that intervention. And I’m not just talking about left-liberal neo-Keynesian economists like Paul Krugman and Brad DeLong. For example, Mark Zandi, a quintessential mainstream economist who was an economic adviser for John McCain in 2008, argued last year that

we would be in a measurably worse place if not for the stimulus. I don’t think it is any coincidence that the great recession ended [the economy stopped contracting] at precisely the same time that the stimulus, and in this case when I say stimulus I am talking about the [American Recovery and Reinvestment Act]….was providing its maximum economic benefit [in the second and third quarter of 2009]….

If we had not had the stimulus, estimates that are put forward for example by the Congressional Budget Office are exactly right. We would have 2-1/2 to 3 million fewer jobs today than we actually have. So employment—payroll employment—is off 8 million jobs from the peak. If we had not had the stimulus we would be off by about 11 million jobs.

Rather than a national unemployment rate of 9.5 percent, “we would have an 11.5 percent unemployment rate.”

A few months ago, Ezra Klein reminded us that the list of economists supporting this view also includes McCain’s top economic adviser in 2008, Douglas Holtz-Eakin. He told Klein that “the argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong. If you throw a trillion dollars at the economy it has an impact, and we needed to do something.” Klein writes,

Holtz-Eakin, of course, is no fan of the American Recovery and Reinvestment Act. He thinks the stimulus was poorly designed and ineffectively managed, and believes it worsened partisan divisions in the Congress by including a grab-bag of dormant ideas that Republicans had long opposed. But that’s a far cry from saying that it pushed growth in the wrong direction.

Bowing to the necessity that Tocqueville complained about, I will repeat the obvious: during a major recession, and especially in the middle of a massive economic crash, the federal government should be running a deficit. Anyone who claims otherwise, seventy years after the end of the Great Depression of the 1930s, is demonstrating either a quasi-theological commitment to certain pre-Keynesian economic dogmas or, more frequently, some combination of economic illiteracy, mindless sloganeering, and/or pure partisan demagoguery.

I will not try to guess which of these categories best applies to the Reuters economics columnist James Pethokoukis. In a representative piece last year he regurgitated one of the silliest talking points that right-wingers keep repeating to “prove” that the 2009 economic stimulus not only didn’t work but, along with healthcare and financial reform, “may actually have impeded economic growth.” Since we all keep hearing this argument ad nauseam, it may be worth noting why it is, at best, a total non-sequitur.

Ezra Klein again:

Pethokoukis’s first argument is that the White House’s “own economists predicted the stimulus would prevent the unemployment rate from hitting 8 percent. But the rate actually rose as high as 10.1 percent, has settled in above 9 percent now, and even Obama’s own team currently hopes for a rate of, at best, 8.25 percent by the end of 2012.” This is, of course, a reference to the infamous Bernstein-Romer paper (pdf). And though it’s fine as a politician’s dishonest soundbite, it’s disqualifying for a serious economic commentator.

The Bernstein-Romer calculations were conducted in December 2008 and released in January 2009. In December 2008, the Bureau of Economic Analysis was projecting (pdf) that in the fourth quarter of 2008, the economy would contract at a 3.8 percent annualized rate. That would later be upgraded to 6.2 percent, and then, earlier this year, to 8.9 percent [retrospectively]. In other words, Bernstein and Romer were building their estimates—and their policy—off numbers that underestimated the economic contraction in the fourth quarter by 5.1 percent of GDP.

And they weren’t alone. Every private-sector forecaster—from Macroeconomic Advisers to Moody’s to Goldman Sachs—was making the same mistake. In December of 2008, no one had any idea how bad things really were. Indeed, we didn’t really know the depth of the damage until a few months ago, when the BEA updated its estimates.

In other words, Romer et al. anticipated that unemployment might be headed toward 9 percent or so, and hoped that a major stimulus could bring it down to less than 8 percent. Instead, we were probably headed toward a peak unemployment rate of 11 to 13 percent or more, so by the same logic one would have expected the ARRA to help bring it down to around 9 to 10 percent—which is what happened.

These results probably strengthen the argument, which a number of people made as far back as early 2009, that the economic stimulus should have been even bigger than it was. Even if you don’t accept that, the excessively optimistic 8 percent estimate trumpeted by Pethokoukis and others like him is simply irrelevant to the case he wants to make. Does the widespread tendency to underestimate the severity of the recession back in 2008 and 2009 somehow prove, or even imply, that the 2009 economic stimulus was unnecessary or had no effect? That claim can’t be taken seriously.

Ezra Klein uses a metaphor to sum up the problem with Pethokoukis’s argument:

It’s like questioning modern medicine because a case of pneumonia initially presented as strep throat. The recession could have been more than twice as deep as anyone thought in late-2008 and, separately, stimulus is a failed policy idea. But the fact that the initial projections were wrong can’t form the basis for your case.

OK, but I would suggest a different metaphor. Suppose you realize that your car is headed into a possible accident and you slam on the brakes. Then there’s a scary moment when it takes longer to slow down than you expected, and you realize the car was going faster, or the road was more slippery, than you thought. Does that prove there was no point in hitting the brakes at all? If your answer is yes, I suggest you stay away from economic policy.

As Ezra Klein writes, “When economic commentators use this argument, I know not to take them seriously, because they either don’t know the facts or aren’t letting them stand in the way of their argument.” In other words, the next time you hear this particular right-wing cliché, it’s safe to stop listening.