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Research Desk: Where would unemployment and GDP growth be without the stimulus?

By Dylan Matthews

jimjinphx asks:

Has anyone done a side-by-side comparison of the results (GDP growth, employment, etc,)of the Obama administration economic policies (stimulus, etc) and the policies advocated by the Republicans (spending freeze, no stimulus, etc.)?

I can't account for the effects of a spending freeze, but the CBO's latest estimate (PDF) of the effect of the stimulus, used in conjunction with BLS unemployment figures and BEA GDP data, we can compare the unemployment and GDP growth rates with and without the stimulus. First let's recall Christina Romer and Jared Bernstein's famous graph from January 2009 predicting the unemployment rate with and without a recovery package:

romer_graph.png

The actual data, of course, is worse than that. The blue line is the actual unemployment rate, the red is unemployment without the stimulus under the CBO's lower estimate of the stimulus' effectiveness, and the yellow is unemployment without the stimulus under the CBO's higher estimate:

unemployment_graph.png

The stimulus still made a substantial difference, even if the unemployment rate is not actually falling, and the current 9.7 percent unemployment rate is nothing to celebrate. Here's the same comparison on GDP data:

gdp_graph.png

Again, this isn't an encouraging graph; GDP growth is falling, and isn't where it needs to be to get unemployment to a reasonable level. But it's still substantially higher than it would have been without the stimulus.

By Washington Post Editors  |  August 25, 2010; 12:00 PM ET
 
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Comments

I guess the question that leaps immediately to mind is, why should we believe that the bottom two graphs are any more accurate than the top one?

Posted by: tomtildrum | August 25, 2010 12:25 PM | Report abuse

Mark Zandi spoke to these issues with the Christian Science Monitor this morning

http://www.csmonitor.com/USA/Politics/monitor_breakfast/2010/0825/Economist-Zandi-John-Boehner-just-wrong-about-Obama-stimulus

Posted by: bdballard | August 25, 2010 12:41 PM | Report abuse

This is BS -- no one knows for sure that unemployment would have gone that high with the stimulus package -- I could make a similar argument that unemployment (and the economy as a whole) would be in a much better position today without it.

Posted by: JakeD2 | August 25, 2010 1:27 PM | Report abuse

I mean "withOUT the stimulus package" (darn Spellchecker ; )

Posted by: JakeD2 | August 25, 2010 1:30 PM | Report abuse

I'm not speaking from a partisan viewpoint at all but it's impossible to argue that the stimulus would have no effect at all. The GOP leadership isn't saying that, in fact no one is, instead the conservatives are claiming that the stimulus had only minor and temporary effects not worth its substantial price tag. In fact those graphs might be able to bolster the GOP's criticisms...over $700 billion for such a meddling effect, though I'm sure progressives could merely say that this is proof that a more costly and wide reaching stimulus was required.

Posted by: cdnpoljunkie | August 25, 2010 1:35 PM | Report abuse

JakeD2 *could* make such an argument--course it wouldn't be based on, you know, real-world employment or GDP data or anything. Stuff like that just gets in the way of a good ole right-wing assertion.

Posted by: steveandshelley | August 25, 2010 1:36 PM | Report abuse

Zandi, in his comments this morning, was careful to single-out the American Recovery and Reinvestment Act as the stimulus package he was discussing. It's an important clarification & I'm glad Zandi made it.

In addition to the ARRA, there have been other stimulus attempts (eg: the PPACA, which was advertised as creating 400,000 new jobs but now is acknowledged as eliminating an equal or greater number each year) and each of these other stimulus efforts has has its own cost. When the total cost of all advertised stimulus efforts (not just the ARRA) is considered, the cost/benefit picture changes somewhat.

Posted by: rmgregory | August 25, 2010 2:11 PM | Report abuse

Jake's ire might be more productively and informatively addressed at the model methodologies rather than the model results. Jake might offer a methodology or modeling framework that results in "unemployment (and the economy as a whole) would be in a much better position today without it." (I doubt that such a result would come from "a similar argument.")

Posted by: bdballard | August 25, 2010 2:13 PM | Report abuse

I wonder how the stimulus/not stimulus breakout looks by employment sector.

Everything I've read indicates stimulus spending has been helpful in keeping government employees employed, but what about private sector employees?

Since there weren't ever massive public sector layoffs it would seem that the stimulus has suceeded in keeping those lucky folks employed, with less luck in re-employing laid off private sector employees.

Posted by: RedBird27 | August 25, 2010 2:18 PM | Report abuse

any comparable graph that shows come 2014 or later what effect any potential lower rating on our debt (due to an increased deficit) would have on it. Or better yet what is the stimulus going to cost us in the end years.

Posted by: visionbrkr | August 25, 2010 2:35 PM | Report abuse

Matthews, are you in harvard on affirmative action or something?

The appropriate comparison is not comparing doing something (stimulus) versus doing nothing, but rather the passed stimulus bill versus other alternatives not taken.

You may be familiar with opportunity costs, cost of capital, etc., etc. etc.?

Klein goes on vacation and it's amateur hour. unbelievable.

Posted by: cdosquared5 | August 25, 2010 2:40 PM | Report abuse

I find terms associated with the stimulus like "multiplier effect" to just be a mask on the actual financial transactions going on.

As best I can tell, the stimulus as a financial vehicle is no different then trading on margin, or leveraging your position to maximize returns. Essentially, you borrow money, then invest it hoping to earn a higher return then the interest you borrowed it at. The decisions on how to allocate that capital are what makes that either a good bet or a bad bet.

There is no default multiplier no more than there is a default return on leveraging your position. Risk is risk in such a financial endeavor no matter if its public or private.

And just for the record, I believe we have spent about $500 billion or so of the stimulus so far (correct me if I'm wrong on that) which works out to roughly 3% of GDP. So if the stimulus was performing on par, the economy would grow - or not shrink as much - by about 3% of GDP. That's about the spread shown in Klein's graph.

Labor force minus unemployment - according to CIA World Factbook - is about 140 million. That works out to about $100,000 per job on a GDP basis. By that same token, $500 billion spent should generate approx. five million jobs if the stimulus created jobs at the same efficiency as the wider economy. By that measure, the stimulus has been rather inefficient at creating jobs.

Posted by: HAL-9000 | August 25, 2010 2:59 PM | Report abuse

You know what's fun? Being an anonymous commenter on a blog on a newspaper website and dismissing nonpartisan analysis from career economists and policy analysts at the CBO because you don't like the results. Without any counter analysis or details about why they're wrong. Fun!

Posted by: vvf2 | August 25, 2010 3:45 PM | Report abuse

Here's the key sentence in this report:

"Although CBO has examined data on output and employment during the period since ARRA’s enactment, those data are not as helpful in determining ARRA’s economic effects as might be supposed because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact."

The CBO admits it's own report is garbage. And they're right.

The CBO scored Obamacare based on numbers given to them by Pelosi, Reid, and their hacks in order to pass a fraud. I've no doubt those same Pelosi and Reid hacks intervened here to lie to the American people again. And, naturally, the dishonest Klein and his equally dishonest little beta-male interns (like Dylan Matthews) are always bending over to shill for the Democrats.

Posted by: steve_tsouloufis | August 25, 2010 3:54 PM | Report abuse

The problem with the stimulus is that even if it successfully increases GDP, the increase in GDP is based on a temporary surge in spending.

When the stimulus ends, the economy falls back to where it would have been without the stimulus - in fact it likely falls somewhat behind it, because the stimulus directs resources to unsustainable activities based on where the stimulus dollars were going.

Take construction workers. Without stimulus, a construction worker who is laid off might have seen the writing on the wall, gone to community college and retrained in a different speciality. With stimulus, he gets paid to repave (often times) perfectly fine roads. When the stimulus money is gone, the construction sector will be in the doldrums because we have hyperstimulated real estate for years and demand for new construction will not return to 2007 levels for a very long time - the construction worker in this case is unemployed, and all we have to show for it is debt and a (slightly nicer) road.

A massive credit bubble created unsustainable spending and employment patterns in the United States. When the credit bubble collapsed, the economy had to start the Herculean task of reallocating resources, which takes time and reduces output and employment initially.

Consumers and businesses had levered up too much, and banks are full of bad assets and capital constrained. It is madness to try to restart the credit binge.

To the extent people hit hard by the recession need help, then we should help them. But ultimately, we need to let people who employed in the 'never coming back' areas retrain and figure out what they are going to do, because stimulus can't last forever. The Federal Government cannot prop up shrinking sectors forever, and in doing so it delays the necessary adjustment.

Posted by: justin84 | August 25, 2010 3:56 PM | Report abuse

"Where would unemployment and GDP growth be without the stimulus?"

Exactly where they are going to be the minute stimulus stops. Except, of course, the stimulus leaves behind massive debt that will negatively affect prospects for the economy going forward. None of that effect of the debt is factored into those pretty graphs.

A trillion dollars ought to buy something, and stimulus did a dandy of job of temporarily goosing some data points (most of which are subsequently revised downwards), but cure what's ailing us? No.

Posted by: bgmma50 | August 25, 2010 4:31 PM | Report abuse

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Posted by: getthetruth | August 25, 2010 5:23 PM | Report abuse

Oh come on! If you want some graphs from my fevered imagination - which would certainly be as valid as the ones you used - email me and I'll send them along.

CK

Posted by: ckessler55943 | August 25, 2010 6:23 PM | Report abuse

Is it really the stimulus packages which are doing the trick? I have my doubts...

http://www.qualityresearch.org.uk/services/ourservices.html

http://www.writessay.com

Posted by: SaraBrownQR | August 26, 2010 8:24 AM | Report abuse

The fundamental problem with the first chart that was produced by Christina Romer and the rest of Obama's economic team wasn't that it was wrong about what the rate of unemployment is now, but rather the thinking behind it that believed you could predict the effect of government policy on an economy the size of the United States with that level of precision. Economics is not a science. You can't apply the scientific method to it the way you can to physics and chemistry. Jim Manzi describes the root issue quite clearly:

http://www.tnr.com/blog/critics/77109/stimulus-spending-confusion-whos-right

http://www.city-journal.org/2010/20_3_social-science.html

This administration has more faith (and that's the correct word to use) in government policy to make improvements in the country's well being since the early 1960's when we had the "Best and the Brightest". My worry is that the same thinking that produced the "Unemployment Rate With and Without the Recovery Plan" chart also went into the proposition behind the health care bill that you can increase coverage to most of the uninsured, reduce costs, and "everyone who likes their current insurance will get to keep it" all at the same time.

Posted by: jnc4p | August 26, 2010 10:13 AM | Report abuse

To all you highly informed reich-wing economists here: demonstrate the employment impact of the 30% of the stimulus that was spent (wasted) on tax cuts? Without increasing consumer demand, how many businesses that got tax cuts hired or retained people?
Provide numbers not out of your butts.

Posted by: k2isnothome | August 26, 2010 12:56 PM | Report abuse

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