Wednesday, February 26, 2014

The Obama Stimulus Was Good, Not Great

As we came up on its fifth anniversary, Paul Krugman last week wrote an analysis of the outcome of the ARRA, Barack Obama's stimulus act. He posits that the stimulus worked but was too small to be as effective as we needed it to be. Krugman also points out that it was a political failure, partly caused by a too-rosy prediction of its effects. The administration oversold it. The public was suspicious and only occasionally supported it.

Krugman has it right, in my view, but opponents would counter that of course Krugman would support it: He's a Keynesian. Okay, then, what's the best contrary view to Krugman?

That's difficult to sort out. People take sides. We're not surprised that the NYTimes might say it worked and the WSJ would say that it didn't. Dean Baker thought it was too small. Stanford's John Taylor disagreed. Battle lines are thus drawn, and they're not helpful. Middle-of-the-roader Mark Zandi was probably closer to the mark.

Some analyses are dead giveaways. An example is the Chicago Tribune op-ed by Steve Chapman that declared the Obama stimulus a failure:
The idea behind channeling money to state governments is that it would reduce the paring of government payrolls, thus preserving the spending power of public employees. But the plan went awry, according to a paper by Dartmouth College economists James Feyrer and Bruce Sacerdote published by the National Bureau of Economic Research.
"Transfers to the states to support education and law enforcement appear to have little effect," they concluded. Most likely, they said, states used the money to avoid raising taxes or borrowing money.
So, Feyrer and Sacerdote declared the stimulus a failure. Steve Chapman said so, using just the one quote from the Dartmouth study. But wait a minute. Dylan Matthews in the Washington Post cites the Feyrer-Sacerdote study on several points, including the one Chapman cites. However, Feyrer and Sacerdote liked parts of the stimulus:
Who did it: James Feyrer and Bruce Sacerdote, Dartmouth College.
What it says: The stimulus had a positive, statistically significant effect on employment. The effects varied by type of spending. Aid to states for education and law enforcement didn’t have a significant effect, but aid to low-income people and infrastructure spending showed very positive impacts. The multiplier was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and between 0.47 and 1.06 for the stimulus overall.
So, the overall view of Feyrer and Sacerdote was positive, especially in the effect on employment. Matthews notes that their study does indicate the stimulus did little with its aid to the states. Verdict? Steve Chapman of the Chicago Tribune can't be trusted in his analysis.

Who can we trust? I trust Krugman because he's been proven correct over time. He says something and years later he turns out to be right. If he makes a mistake, he admits it. Sure, he's probably guilty of smoothing some things over, but it doesn't color his work. So I trust him.

I read the Matthews analysis and found it broad enough -- with no Chapman cherry-picking -- to be convincing. The stimulus worked but not fabulously. It probably would have worked better if there were more direct employment stimulus, more public works spending on infrastructure.

Like the PPACA -- Obamacare -- too much effort was made to bring Republican votes into the mix, and so it was with the ARRA. To mollify the opposition, there was too much tax relief, and the state aid was too unfocused. The irony is that no Republicans voted for it in the House, and three did so in the Senate, but that's been par for the course during the entire Obama administration.

The real tragedy is, just as Krugman says, that fiscal stimulus has earned a bad name, despite the fact that austerity in Europe proved so disastrous. This has been a political failure for stimulus spending, not a evidential one. Here's some evidence:

That's the White House look. What does the Fed say?

Why the downturn in mid-2010 in the Fed numbers? the WH has private sector numbers, and the Fed has total numbers. Factor in reduced federal spending, you lose public sector jobs. Factor out public sector jobs, and the growth is continuous. Moral of the story? Don't cut public sector jobs in an economic downturn. We will learn? I doubt it. Europe didn't.

European growth has been flat compared to the U.S.

European austerity, driven by Germany, led to a double-dip recession that the U.S. didn't experience.

Again, stimulus works, austerity doesn't. Politically, these facts fell on deaf ears, or so Krugman believes. Wikipedia summarizes it a little differently. (Spoiler alert: Many thought that the stimulus worked.) American public opinion? It's been all over the map, but mostly negative by a few points. It's not surprising.

No comments:

Post a Comment