Friday, September 16, 2011

Right-wing economic claptrap about the 2009 "stimulus" – A reality check from Ezra Klein

At one point in Tocqueville's Recollections, his wonderful book about the 1848 revolution in France and his role in the politics of its aftermath, Tocqueville muses that one of the distressing things about being a politician is that you have to keep saying the same things over and over again. Alas, that seems to be true for pundits and bloggers as well as elected officials. And one reason why points that should be obvious need to be repeated endlessly is that one has to keep responding over and over to the same absurd and dishonest propaganda lines, no matter how many times they have been refuted or discredited. For example ...

Most serious economic analysts agree that the 2009 economic "stimulus" (the American Recovery and Reinvestment Act) helped pull the economy out of its downward spiral and significantly reduce the level of unemployment, which would have been even higher than it is without that intervention. And I'm not just talking about left-liberal neo-Keynesian economists like Paul Krugman and Brad DeLong and others of that ilk. The list of economists who share this basic assessment includes, for example, Mark Zandi, a quintessential mainstream economist who was an economic adviser for John McCain in 2008.
“[W]e would be in a measurably worse place if not for the stimulus. I don’t think it is any coincidence that the great recession ended [i.e., the economy stopped contracting] at precisely the same time that the stimulus, and in this case when I say stimulus I am talking about the [American Recovery and Reinvestment Act] ….was providing its maximum economic benefit.” That maximum benefit came in the second and third quarter of 2009, Zandi said.

What would have happened without the Recovery Act's fiscal stimulus? “If we had not had the stimulus, estimates that are put forward for example by the Congressional Budget Office are exactly right. We would have 2-1/2 to 3 million fewer jobs today than we actually have. So employment – payroll employment – is off 8 million jobs from the peak. If we had not had the stimulus we would be off by about 11 million jobs,” Zandi said.

Rather than a national unemployment rate of 9.5 percent, “we would have an 11.5 percent unemployment rate” [....]
A few days ago Ezra Klein reminded us that the list also includes McCain's top economic adviser in 2008, Douglas Holtz-Eakin.
As Doug Holtz-Eakin, chief economic adviser to John McCain during the 2008 campaign and current president of the American Action Forum, told me, “the argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong. If you throw a trillion dollars at the economy it has an impact, and we needed to do something.”

Holtz-Eakin, of course, is no fan of the American Recovery and Reinvestment Act. He thinks the stimulus was poorly designed and ineffectively managed, and believes it worsened partisan divisions in the Congress by including a grab-bag of dormant ideas that Republicans had long opposed. But that’s a far cry from saying that it pushed growth in the wrong direction.
Bowing to the necessity that Tocqueville complained about, I will repeat something I said last Friday: During a major recession, and especially in the middle of a massive economic crash, the federal government should be running a deficit. Anyone who claims otherwise, 70 years after the end of the Great Depression of the 1930s, is demonstrating either a quasi-theological commitment to certain pre-Keynesian economic dogmas or, more frequently, some combination of economic illiteracy, mindless sloganeering, and/or pure partisan demagoguery.

=> I will not try to guess which of these categories best applies to the Reuters economics columnist James Pethokoukis. In a recent piece he regurgitated one of the silliest talking points that right-wingers keep repeating to 'prove' that the 2009 economic stimulus didn't work. Since we all keep hearing it ad nauseam, it may be worth noting why it is, at best, a total non-sequitur.

Ezra Klein again:
Pethokoukis begins with a big claim: “Instead of saving us from a Greater Depression, the Obama stimulus (together with his health-care plan and financial reforms) was a two-year waste of precious time and money that may actually have impeded economic growth.” [....]

So what evidence does Pethokoukis offer for his position? Almost no evidence, actually. And what he does have calls the rest of the article into question.

Pethokoukis’s first argument is that the White House’s “own economists predicted the stimulus would prevent the unemployment rate from hitting 8 percent. But the rate actually rose as high as 10.1 percent, has settled in above 9 percent now, and even Obama’s own team currently hopes for a rate of, at best, 8.25 percent by the end of 2012.” This is, of course, a reference to the infamous Bernstein-Romer paper (pdf). And though it’s fine as a politician’s dishonest soundbite, it’s disqualifying for a serious economic commentator.

The Bernstein-Romer calculations were conducted in December 2008 and released in January 2009. In December 2008, the Bureau of Economic Analysis was projecting (pdf) that in the fourth quarter of 2008, the economy would contract at a 3.8 percent annualized rate. That would later be upgraded to 6.2 percent, and then, earlier this year, to 8.9 percent [retrospectively]. In other words, Bernstein and Romer were building their estimates — and their policy — off numbers that underestimated the economic contraction in the fourth quarter by 5.1 percent of GDP.

And they weren’t alone. Every private-sector forecaster — from Macroeconomic Advisers to Moody’s to Goldman Sachs — was making the same mistake. In December of 2008, no one had any idea how bad things really were. Indeed, we didn’t really know the depth of the damage until a few months ago, when the BEA updated its estimates.
In other words, in the fall of 2008 most people underestimated how badly the economy was crashing. So Romer et al. anticipated that unemployment might be headed toward 9% or so, and hoped that a major stimulus could bring it down to less than 8%. Instead, we were probably headed toward a peak unemployment rate of 11-13% or more, so by the same logic one would have expected the ARRA to help bring it down to around 9-10% ... which is what happened.

These results probably strengthen the argument, which a number of people made as far back as early 2009, that the economic stimulus should have been even bigger. Even if you don't accept that, the most you can say about the excessively optimistic 8% estimate trumpeted by Pethoukis and others like him is that it is simply irrelevant to the case he wants to make. Does the widespread tendency to underestimate the severity of the recession back in 2008 and 2009 somehow prove, or even imply, that the 2009 economic stimulus was unnecessary or had no effect? That claim can't be taken seriously by anyone acquainted with simple logic.

One might, hypothetically, try to make other arguments, based on different evidence, to try to reach the conclusion that the 2009 economic stimulus was unnecessary or even harmful. But this particular right-wing sound-bite provides no evidence at all for (or, by itself, against) such a conclusion. To pretend that it does is dishonest or, at best, confused.
The bottom line is simple [....] In the fourth quarter of 2008, our economic inputs [i.e., the estimates on which models and predictions were based] were wrong. So forecasts using those inputs to make predictions about the future produced answers that were also wrong. That says nothing about whether the stimulus worked or failed. It’s like questioning modern medicine because a case of pneumonia initially presented as strep throat. The recession could have been more than twice as deep as anyone thought in late-2008 and, separately, stimulus is a failed policy idea. But the fact that the initial projections were wrong can’t form the basis for your case.
OK, but I would suggest a different metaphor. Suppose you realize that your car is headed into a possible accident and you slam on the brakes. Then there's a scary moment when it takes longer to slow down than you expected, and you realize the car was going faster, or the road was more slippery, than you thought. Does that prove there was no point in hitting the brakes at all? If your answer is yes, I suggest you stay away from economic policy.
(In general, I have actually found this to be a useful test: When economic commentators use this argument, I know not to take them seriously, because they either don’t know the facts or aren’t letting them stand in the way of their argument.)

Pethokoukis certainly knows these facts. He just chose not to mention them — even to attempt to refute them — in his article. That calls all the rest of it into question. [....]
In other words, the next time you hear (or read) this particular right-wing cliché, you can assume it's safe to stop listening (or reading), since the rest is likely to be nonsense, too.

Yours for reality-based discourse,
Jeff Weintraub