Monday, February 20, 2012

Understanding the stimulus

Here is the truth:  The stimulus worked.  Without it unemployment would have reached much higher levels and we would not be in recovery.

Rebecca Thiess at the Economic Policy Institute took at look at the impact of the stimulus on the three-year anniversary of the American Recovery and Reinvestment Act (ARRA).  She notes that the U.S. economy was in major trouble in the fourth quarter of 2008.  Gross Domestic Product (GDP) was declining at an annual rate of 8.9 percent.  Job losses were skyrocketing and unemployment was on its way to 12% or higher.

In February 2009, Obama and the Democrats passed the ARRA.  At that point, things began to change.  Slowly, much too slowly for many, the decline stopped or slowed and America began to recover.  Here are the facts:
  • In the second quarter of 2009—the first full quarter after the stimulus was passed—GDP declined at a much slower pace (0.7 percent), and growth resumed in the third quarter;
  • Job losses slowed dramatically throughout 2009 and the economy started adding jobs in early 2010; and
  • Private sector layoffs, which had peaked in Feb. 2009, began a rapid decline and returned to pre-recession levels by early Feb. 2010.

So, what the Republicans say is not true.  The stimulus worked.  But, why didn’t it work better or faster?  Thiess cites an explanation Josh Bivens offered in the form of a metaphor.

 “The unemployment rate without the Recovery Act would have reached nearly 12%, not the 9% foreseen by the Obama administration. A good metaphor for this controversy is the temperature in a log cabin on a cold winter’s night. Say that the weather forecast is for the temperature to reach 30 degrees Fahrenheit. To stay warm, you decide to burn three logs in the fireplace. You do the math (and chemistry) and calculate that burning these three logs will generate enough heat to bring the inside of the cabin to 50 degrees, or 20 degrees warmer than the ambient temperature.

But the forecast is wrong—and instead temperatures plummet to 10 degrees outside and burning the logs only results in a cabin temperature of 30 degrees. Has log burning failed as a strategy to generate heat? Of course not. Has your estimate of the effectiveness of log burning been wildly wrong? Nope—it was exactly right—it added 20 degrees to the ambient temperature. The only lesson from this one is a simple one: since the weather turned out worse than expected, you need more logs.”

In short, the stimulus didn’t fail.  It did just what it was supposed to do.  The only problem with the stimulus is that few people realized in early 2009 just how bad economic conditions were, so when the Republicans fought to keep the stimulus under a trillion dollars (they wanted none at all), the Democrats ultimately gave in.  They accepted a smaller stimulus believing that it would probably be enough.   They agreed to put just three logs on the fire to warm the economy.  The economy really needed six or nine.  So, we didn’t freeze to death as we might have without the stimulus logs but we didn’t get toasty warm, fast as we had hoped.  The stimulus was enough to knock the chill off the economy.  Now the extremely cold economy seems to be warming.  We will get there.  The stimulus worked.  It would have worked faster and better if it had been larger.  And, it probably would have been larger accept for Republican opposition.

Read more here:

No comments: