CBO Says Be Thankful For The Stimulus

On this the fourth Thanksgiving weekend since the start of the Bush recession, families across America are still struggling with persistently high unemployment, underwater mortgages and stagnant wages. But as the nonpartisan Congressional

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On this the fourth Thanksgiving weekend since the start of the Bush recession, families across America are still struggling with persistently high unemployment, underwater mortgages and stagnant wages. But as the nonpartisan Congressional Budget Office (CBO) reminded us this week, Americans can be thankful for the 2009 stimulus. Despite Republican mythmaking that the American Recovery and Reinvestment Act (ARRA) "created zero jobs," the CBO reported that the stimulus added up to 2.4 million jobs and boosted GDP by as much as 1.9 points in the past quarter. As it turns out, that conclusion confirms the consensus of most economists - including John McCain's 2008 brain trust- that President Obama's recovery program is continuing to deliver benefits for the American people.

From the beginning, the CBO has testified to the success of the largely concluded 2009 stimulus package in driving employment and economic growth. (That's one reason why Republicans like GOP frontrunner Newt Gingrich want to abolish the agency.) Now, as The Hill reported Tuesday, the CBO has found that "President Obama's 2009 stimulus package continues to benefit the struggling economy":

The agency said the measure raised gross domestic product by between 0.3 and 1.9 percent in the third quarter of 2011, which ended Sept. 30. The Commerce Department said Tuesday that GDP in that quarter was only 2 percent total.

CBO said that the stimulus also lowered the unemployment rate by between 0.2 and 1.3 percentage points and increased the number of people employed by between 0.4 million and 2.4 million...

By CBO's numbers, the $800 billion stimulus added up to 0.9 million jobs in 2009, 3.3 million jobs in 2010 and 2.6 million jobs in 2011.

But to really gauge the success of the stimulus, it's worth taking a second look at just how dire the U.S. economic situation was when the Obama administration made its fateful prediction that unemployment would peak at 8 percent. As The Economist and the Washington Post's Ezra Klein detailed, in early 2009 the American economy was not only in much worse shape than anyone imagined; it was literally on the brink of collapse.

As The Economist explained the run-up to the passage of the $787 billion recovery program:

The White House looked at the economic situation, sized up Congress, and took its shot. Unfortunately, the situation was far more dire than anyone in the administration or in Congress supposed..

Output in the third and fourth quarters fell by 3.7% and 8.9%, respectively, not at 0.5% and 3.8% as believed at the time. Employment was also falling much faster than estimated. Some 820,000 jobs were lost in January, rather than the 598,000 then reported. In the three months prior to the passage of stimulus, the economy cut loose 2.2m workers, not 1.8m. In January, total employment was already 1m workers below the level shown in the official data.

Klein points out that "wasn't until this year that the actual number was revealed" for Q4 2008 by the Bureau of Labor Statistics. As The Economist lamented, the Obama administration was "flying blind."

Whether the White House should have known the unemployment picture was going to be much, much worse (as Joseph Stiglitz and Jared Bernstein argued) or that the stimulus package itself was too small and too laden with tax breaks (as Paul Krugman warned at the time), there is little question that the American Recovery and Reinvestment Act worked largely as designed. And you don't have to take the CBO's word for it. You can just ask some of John McCain's advisers.

Douglas Holtz-Eakin, former head of the CBO and chief economic adviser to John McCain during the 2008 election, acknowledged the impact of the stimulus. Certainly no fan of either Barack Obama or the design of the ARRA, Holtz-Eakin told Ezra Klein that:

"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."

Mark Zandi, another adviser to McCain, was much more adamant. Federal intervention, he and Princeton economist Alan Blinder argued in August 2010, literally saved the United States from a second Great Depression. In "How the Great Recession Was Brought to an End," Blinder and Zandi's models confirmed the impact of the Obama recovery program and concluded that "laissez faire was not an option":

The effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unemployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls. These estimates of the fiscal impact are broadly consistent with those made by the CBO and the Obama administration.

But their modeling also suggests that the totality of federal efforts to rescue the banking system dating back to the fall of 2008 prevented a catastrophic collapse:

We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government's response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.

While the U.S. economy is now experiencing slow but steady growth and job gains, the effects of the stimulus are winding down. (Worse still, the draconian budget-cutting by state and local governments which have already cost 600,000 workers their jobs could rightly be deemed the "anti-stimulus.") As Paul Krugman described the new report from the Congressional Budget Office:

What it tells us is that the US federal government has been practicing destructive fiscal austerity since the middle of 2010 (and that's not even talking about what's happening at the state and local level). Here's the average of CBO's high and low estimates of the impact of the ARRA on the level (not the rate of growth) of GDP by quarter:

And you wonder why the economy isn't recovering strongly?

Which is why the American people and economists alike want more action - and not less- from Washington. Polling shows that jobs and the economy are now consistently rated as a higher priority than deficit reduction, even among Republicans. While Zandi of Moody's Economics aggressively forecast that President Obama's $447 billion American Jobs Act could add 1.9 million jobs and lift GDP by two points next year, a Bloomberg survey of economists concluded the AJA at a minimum would keep the U.S. from falling back into a recession. And as the Washington Post explained this week:

Estimates vary on the extent that growth in the gross domestic product could suffer. Goldman Sachs economic forecaster Alec Phillips estimated that allowing the payroll tax cut to expire would reduce growth by as much as two-thirds of a percentage point in early 2012. Macroeconomic Advisers estimates that it would reduce GDP growth by 0.5 percent and cost the economy 400,000 jobs by the fourth quarter. Allowing unemployment benefits to lapse would result in the economy being slower by an additional quarter of a percent and cost 200,000 jobs.

Whether or not the GOP succeeds in block all or part of the American Jobs Act remains to be seen. And to be sure, President Obama was right when he told CBS News:

"It frustrates people, understandably, when you've got an unemployment rate that is still too high, an economy that's not growing fast enough. And for me to argue, 'Look, we've actually made the right decisions, things would have been much worse has we not made those decisions,' that's not that satisfying if you don't have a job right now," the president said. "And I understand that, and I expect to be judged a year from now on whether or not things have continued to get better."

But on this Thanksgiving Day, Americans can and should be thankful for President Obama's stimulus program.

(For more background, see "Chart Book: Legacy of the Great Recession" from the Center on Budget and Policy Priorities.")

(This piece also appears at Perrspectives.)

About Jon Perr

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