With the economic recovery sputtering and the midterm elections approaching, President Obama is considering additional tax credits and tax breaks, additional spending on clean energy and infrastructure in other words, additional stimulus. But don't call it stimulus! In a recent Politico story about Obama's plans for "emergency fixes to stimulate the economy," the White House press office refused to comment on the scope "other than to say it won't be a 'second stimulus.'"
It's a strange situation. The White House believes the American Recovery and Reinvestment Act of 2009 helped avoid a depression and end a recession, saving or creating about 3 million jobs so far. And most nonpartisan economists basically agree: the $787 billion package of tax cuts, state aid and spending projects helped stimulate economic activity in the short term, which is the whole point of fiscal stimulus. As I wrote in the magazine last week, the Recovery Act is also funding a range of innovative education, health care, transportation and energy policies that will transform the country in the long term.
Nevertheless, the stimulus has become a national punch line. Even Obama quipped on Thanksgiving that his annual pardon had saved or created four turkeys.
The unpopularity of the stimulus is no great mystery. The Administration marketed it as a jobs bill, the only way to prevent rampant unemployment. But rampant unemployment happened anyway. The White House says things would be even worse without the stimulus; the economy was hemorrhaging about 700,000 jobs a month before its shot of fiscal adrenaline, and it's slowly adding jobs now. That's true enough, but "not as awful as it would have been" is not the kind of catchphrase you can build a movement around. Most economists accept the counterintuitive Keynesian idea that government needs to loosen its belt when families and businesses are tightening theirs, but it's awful politics.
"It's hard to sell," says Jared Bernstein, chief economist for Vice President Joe Biden. "If you could show people the world without the Recovery Act, it would be a lot more popular."
Alas, the world doesn't work like that. You can test whether a new drug works with a double-blind study: one group gets the drug, one group doesn't, and you can see which group does better. But you can't run a double-blind study of a macroeconomic policy like the stimulus because there's only one economy. You can't compare its results to a hypothetical economy that didn't get any stimulus. If the economy had recovered faster, Republican critics would be saying it rebounded despite the stimulus and there would be no way to be sure they were wrong.
What was undeniably wrong was a report Bernstein and Christina Romer released during the transition, predicting the stimulus would keep unemployment below 8%. That report was the gift that hasn't stopped giving to the GOP.
Romer, who stepped down Friday as chair of the Council of Economic Advisers, argued in her farewell speech that the report actually nailed the impact of the Recovery Act; the Congressional Budget Office and private analysts have more or less confirmed its forecast that the stimulus would raise GDP by about 3.5% and employment by about 3.5 million jobs from the baseline. But Bernstein and Romer blew the baseline. "We, like virtually every other forecaster, failed to anticipate just how violent the recession would be in the absence of policy," Romer said. At the time, she recalled, the report seemed "scary as hell," but in retrospect, it seems absurdly rosy.
By the time the Recovery Act passed in February, unemployment had already topped 8%; by June, before the stimulus money was really flowing, it was 9.5%. "Our projection turned out to be wrong even before the Recovery Act had a chance to get off the ground, which is about as clear-cut evidence as one could imagine that the problem was in our assessment of the baseline, and not in the effects of the Act," Romer said.
If only clear-cut evidence mattered in politics. At recovery.gov, the Administration has documented about 750,000 jobs directly created by stimulus contracts, but Republican critics continue to argue that the government never created a job. Their favorite talking point is that the New Deal didn't end the Depression; World War II ended the Depression. Of course, the New Deal did start pulling the country out of the ditch, and World War II was the mother of all stimulus programs. Whatever. All the voters seem to notice is that the economy remains weak.
As Vladimir Lenin liked to ask: What is to be done? (At a Tea Party event I attended in South Carolina, one speaker called Lenin the real father of Keynesian stimulus.) Republicans like Karl Rove have suggested that Obama should cancel the rest of the stimulus and focus on deficit reduction. Since Rove and the GOP converted massive surpluses into spectacular deficits when they controlled the government, one might wonder about the motives behind this suggestion. Deficits are a serious long-term problem, but conservative predictions that stimulus-driven deficits would lead to high interest rates could not have been less accurate. And as Bernstein pointed out on the White House blog, cancelling stimulus projects would directly toss more Americans out of work. Anyway, the stimulus hasn't added nearly as much to the deficit as President Bush's tax cuts have added or a double-dip recession would add. People with jobs reduce deficits by paying taxes and by spending money so that businesses can hire other people who pay more taxes and spend more money. People without jobs increase the deficit by receiving government benefits.
So even if deficit reduction is your top priority, which it shouldn't be at a time like this and it wouldn't be, if you were unemployed the answer is to fix the economy and reduce unemployment. Unfortunately, as Romer pointed out in her speech, titled "Not My Father's Recession," this downturn is like none other since the Depression. The Federal Reserve can't lower interest rates to juice the economy because interest rates are already zero. Meanwhile, many state and local governments have offset the federal stimulus with austerity, sucking money back out of the economy by raising taxes, cutting spending and laying off public employees. (The austerity would have been even more painful if the Recovery Act hadn't bailed out every state but again, "not as awful as it would have been" is a tough sell.) The private sector has added jobs every month this year, but after a global financial implosion and an epic housing collapse compounded by debt crises and weak growth in Europe business and consumer confidence remains shaky, and the gains have been frustratingly slow.
The only short-term answer, Romer argued, is to "spend more and tax less," to use public dollars to fill the gap in private demand. Maybe a payroll-tax holiday that would give middle-class families more money to spend. Maybe new highway projects that would put more people to work. Economists call this stimulus, although Romer only mentioned the word once in her speech. Presumably, if she were staying in the Administration, she wouldn't have mentioned it at all.
Actually, polls suggest that the Recovery Act's actual contents middle-class tax cuts, road projects, wind farms and the like are quite popular, which is why so many antistimulus Republicans have claimed credit for stimulus projects in their districts. It's just the word stimulus that's toxic. As long as the economy remains weak, it will remain toxic. Even though the economy would be even weaker without stimulus.
This is the problem with inheriting a mess, the counterfactual problem. Health-insurance premiums will still rise despite Obama's health care reforms they just won't rise quite as much as they would have. We'll still be dependent on foreign oil despite Obama's green-energy push just not quite as dependent as we would have been. But in politics, as in macroeconomics, you can't prove your point about the world without what you've done through a double-blind study. It's not exactly an inspiring slogan, but for now, "not as awful as it would have been" is all Obama's got.