The Stimulus: Success or Failure?

Aside from mentioning health care, the fastest way to start a political/economic argument these days is to assert that the $787 billion fiscal stimulus package is proving a success -- or a failure. That's because it is, and it isn't.

Critics, for example, point to unemployment, on the rise all year, and now at 9.8%. A question without an answer is what would the rate be without the stimulus?

Comments from the Obama administration haven't helped. The White House said the goal is to save or create 3 million jobs. As we observed months ago, there's no way to assess that goal because no one can prove how many jobs were saved by the stimulus (though some obviously were). On top of that, after the package was passed in February, Christina Romer, chair of the President's Council of Economic Advisers, said the stimulus would keep the unemployment rate around 8% this year.

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So, it's a flop, right? Not so fast.

The stimulus included an extension of unemployment benefits, subsidies for COBRA health care for the unemployed, a one-time payment of $250 to Social Security recipients and several billion to state governments to help cover the costs of Medicaid and education. State and local governments are laying off teachers and cutting services anyway, but without money from Uncle Sam, it would be worse. Administration officials point to the fact that job losses were close to 800,000 a month before the stimulus and are now down to about 250,000. Still losing -- but at a slower rate. Progress, right? Well, sort of.

This isn't meant to praise the stimulus. There were better taxes to cut, and quicker and more efficient spending targets. No doubt some of the "shovel ready" highway projects being funded are a waste at worst, and make-work at best.

But, $90 billion per quarter has an impact. How much depends on who your favorite economist is. Mark Zandi, chief economist with Moody's Economy.com, says the stimulus will add about 3.5 percentage points to third quarter growth. Some others say 4 points. The nonpartisan Congressional Budget Office offers a range from a low of 1.4 percentage points for 2009 to a high of 3.8. The third quarter GDP estimate will be released Oct. 29 and is likely to show an increase of around 3.5 points, maybe less. So it's not a stretch to say that without the stimulus money the economy would still be contracting, not growing.

Some critics, and some supporters, say that the credit for keeping the economy from going over a cliff last March is due less to the White House and Congress and more to the multi-pronged approach of the Federal Reserve. But even the Fed has critics who say its efforts will trigger inflation in 2010 or 2011 at the latest.

What it comes down to is a reminder that economics is a social science. We can't do lab experiments in which all but one variable are held constant in order to test a theory. The fiscal stimulus, the Fed's monetary stimulus and a turn in the business cycle all contributed to ending the recession.

Rather than arguing about the past, let's devote our energies to the big challenges that face policymakers now. First, to unwind the monetary stimulus without choking off the recovery. Second, to control spending and lower the budget deficit. And third, not to go overboard and hobble business with many new rules. That would be a better use of our time and efforts.