Economists agree stimulus was too small, but worth it

New Consensus Sees Stimulus Package as Worthy Step
By Jackie Calmes and Michael Cooper
November 20, 2009 | New York Times

Now that unemployment has topped 10 percent, some liberal-leaning economists see confirmation of their warnings that the $787 billion stimulus package President Obama signed into law last February was way too small. The economy needs a second big infusion, they say.

Jalin Willis checked the job listings in Denver last month. The nation's unemployment rate topped 10 percent this month.

No, some conservative-leaning economists counter, we were right: The package has been wasteful, ineffectual and even harmful to the extent that it adds to the nation's debt and crowds out private-sector borrowing.

These long-running arguments have flared now that the White House and Congressional leaders are talking about a new "jobs bill." But with roughly a quarter of the stimulus money out the door after nine months, the accumulation of hard data and real-life experience has allowed more dispassionate analysts to reach a consensus that the stimulus package, messy as it is, is working.

The legislation, a variety of economists say, is helping an economy in free fall a year ago to grow again and shed fewer jobs than it otherwise would. Mr. Obama's promise to "save or create" about 3.5 million jobs by the end of 2010 is roughly on track, though far more jobs are being saved than created, especially among states and cities using their money to avoid cutting teachers, police officers and other workers.

"It was worth doing — it's made a difference," said Nigel Gault, chief economist at IHS Global Insight, a financial forecasting and analysis group based in Lexington, Mass.

Mr. Gault added: "I don't think it's right to look at it by saying, 'Well, the economy is still doing extremely badly, therefore the stimulus didn't work.' I'm afraid the answer is, yes, we did badly but we would have done even worse without the stimulus."

In interviews, a broad range of economists said the White House and Congress were right to structure the package as a mix of tax cuts and spending, rather than just tax cuts as Republicans prefer or just spending as many Democrats do. And it is fortuitous, many say, that the money gets doled out over two years — longer for major construction — considering the probable length of the "jobless recovery" under way as wary employers hold off on new hiring.

But there are criticisms, mainly that the Obama team relied last winter on overly optimistic economic assumptions and oversold the job-creating benefits of the stimulus package.

Optimistic assumptions in turn contributed to producing a package that if anything is too small, analysts say. "The economy was weaker than we thought at the time, so maybe in retrospect we could have used a little bit more and little bit more front-loaded," said Joel Prakken, chairman of Macroeconomic Advisers, another financial analysis group, in St. Louis.

While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy.

"There should have been more direct federal spending that would have added to aggregate demand," he said. "Temporary tax cuts and one-time transfers to seniors were largely saved and didn't stimulate spending."

Even the $787 billion price tag overstates the plan's stimulus value given changes made in Congress, economists say. Nearly a tenth of the package, $70 billion, comes from a provision adjusting the alternative minimum tax so it does not hit middle-income taxpayers this year. That routine fix, which would do nothing to stimulate the economy, was added in part to seek Republican votes. But to keep the package's overall cost down, provisions that would stimulate the economy — like aid to revenue-starved states and infrastructure projects — got less as a result.

Among Democrats in the White House and Congress, "there was a considerable amount of hand-wringing that it was too small, and I sympathized with that argument," said Mark Zandi, chief economist of Moody's Economy.com and an occasional adviser to lawmakers.

Even so, "the stimulus is doing what it was supposed to do — it is contributing to ending the recession," he added, citing the economy's third-quarter expansion by a 3.5 percent seasonally adjusted annual rate. "In my view, without the stimulus, G.D.P. would still be negative and unemployment would be firmly over 11 percent. And there are a little over 1.1 million more jobs out there as of October than would have been out there without the stimulus."

Politically, however, the president is saddled with his original claim that, with the stimulus, the jobless rate would peak at 8.1 percent — a miscalculation that Republicans constantly recall. While the administration has said its economic assumptions were in line with private forecasts, most of which also underestimated the recession's punch, it was more optimistic than most.

"That was a mistake," said Jeffrey A. Frankel, a Harvard University economist and former Clinton administration official who is a member of the National Bureau of Economic Research panel that judges when recessions start and end. "I thought so at the time."

Christina D. Romer, chairwoman of Mr. Obama's Council of Economic Advisers, said attention to that too-rosy projection "prevents people from focusing on the positive impact of the fiscal stimulus. So of course I find that frustrating."

Much federal infrastructure money has gone not to new job-creating projects but to finance existing plans, which otherwise would be unaffordable to states.

So the stimulus has not "supercharged" transportation construction as was hoped, said Charles Gallagher, an asphalt company owner, speaking for the American Road and Transportation Builders Association, but it has nonetheless been "a welcome Band-Aid" to offset state cuts.

"Many contractors across the nation have been able to sustain, if not add to, their work force," he said.

That sort of impact is what makes federal aid to state governments rank high in economists' reckoning of the stimulus value of various proposals. Every dollar of additional infrastructure spending means $1.57 in economic activity, according to Moody's, and general aid to states carries a $1.41 "bang" for each federal buck.

Even more effective are increases for food stamps ($1.74) and unemployment checks ($1.61), because recipients quickly spend their benefits on goods and services.

By contrast, most temporary tax cuts cost more than the stimulus they provide, according to research by Moody's. That is true of two tax breaks in the stimulus law that Congress, pressed by industry lobbyists, recently extended and sweetened — a tax credit for homebuyers (90 cents of stimulus for each dollar of tax subsidy) and extra deductions for businesses' net operating losses (21 cents).

Economists said Republicans' recent proposals to rescind unspent money would be a mistake.

James Glassman, a senior economist at JPMorgan Chase & Company, said: "If we could be absolutely convinced that the growth we're getting is for reasons beyond the help the government is giving, then that would make sense. But the fact is we can't be certain of that."