No, we’re nowhere close to the limits of effective fiscal stimulus
Robert Samuelson’s op-ed in Sunday’s Washington Post argues that the United States has reached or passed “the practical limits of ‘economic stimulus.’” He’s wrong, and much of the evidence he points to on the fiscal side ranges between grossly misleading and simply inaccurate. Several points:
- More fiscal expansion—particularly deficit-financed spending on infrastructure, aid to states, safety net spending, and well-targeted tax cuts—would accelerate economic growth and boost employment. This may be disputed on editorial pages, but it is not disputed by economists paid for their economic analysis. See analyses from Moody’s Analytics, Macroeconomic Advisers, or EPI’s own analysis of President Obama’s American Jobs Act, most of which Congress has not acted upon. Claims to the contrary are also belied by concern about the so-called “fiscal cliff” professed by both sides of the political aisle; politicians are worried that budget deficits closing too quickly will push the economy into a double-dip recession, as the Congressional Budget Office has forecast under its current law baseline.
- The point of the American Recovery and Reinvestment Act (ARRA) and subsequent ad hoc fiscal stimulus was to boost aggregate demand, not primarily “to inspire optimism by demonstrating government’s commitment to recovery.” Increased aggregate demand from ARRA kicking in and ramping up was responsible for arresting the economy’s rapid contraction in 2009 and the simultaneous deceleration (and eventual reversal) of job losses, not the confidence fairy.
- It is misleading to equate cumulative deficits of $5.1 trillion over fiscal 2009–2012 to the sum cost of economic stimulus. Yes, deficits act as stimulative shock absorbers in recessions. But while deficits expand during recessions, it’s only the cyclical budget deficit that can be viewed as automatic stimulus, not the underlying structural budget deficit. Last year, CBO estimated cyclical budget deficits would total $1.3 trillion over fiscal 2009–2012, or approximately 25 percent of gross budget deficits. The Recovery Act accounted for $782 billion of the non-cyclical deficit over this period, and the sum total of all deliberate, legislative budget policies over this period has been $1.6 trillion. Further, not all spending is stimulative: net interest payments add to deficits but have a small impact on demand (among other things, a large majority of domestic payments go to wealthy households unlikely to spend much extra income coming their way, and roughly half is “leaked” abroad to foreign holders of Treasuries).
- It is especially misleading to pivot from the stimulus “price tag” cited above to CBO estimates that “Obama’s initial stimulus has created between 200,000 and 1.2 million jobs in 2012.” The (false) insinuation is that trillions of dollars of stimulus can barely support a million jobs. Of ARRA’s $833 billion 10-year price tag, $733 billion (88 percent) had spent out before fiscal year 2012 (CBO, Box 1-1). ARRA’s $49 billion fiscal 2012 budgetary impact accounts for less than 6 percent of the total price tag, and the calendar year 2012 impact was even smaller. Subsequent ad hoc stimulus—emergency unemployment compensation, the payroll tax cut, and expansion of refundable tax credits—has done much more for the economy than ARRA this year, and are thus the relevant policies for evaluating the effectiveness of fiscal stimulus (we pegged EUC and the payroll tax cut at supporting 1.5 million jobs in 2012). In grading ARRA, the pertinent CBO estimate is the addition of between 700,000 and 3.3 million jobs in 2010. Put differently: It’s true that ARRA didn’t support many jobs in 2012—because it wasn’t meant to and largely was spent out by then. This doesn’t mean that we’re at the economic limits of stimulus, it means we really needed to enact more.
- A blanket indictment of fiscal policy failing to generate a robust recovery that ignores state and local government fiscal policy, which has been deeply contractionary and has dragged at quarterly growth for the past 11 consecutive GDP reports, is also deeply misleading. As my colleague Ethan Pollack points out, state and local cuts have more than offset the federal fiscal expansion over the last two years. My colleagues economists Josh Bivens and Heidi Shierholz estimate that “if it weren’t for state and local austerity, the labor market would have 2.3 million more jobs today; half of these jobs would be in the private sector.” Again, the problem isn’t the economic limits of stimulus, it’s that the state and local anti-stimulus has effectively overwhelmed insufficient federal support.
- Samuelson’s dismissiveness of stimulus is targeted at both monetary and fiscal stimulus. Economists Mark Zandi and Alan Blinder have a great paper (How the Great Recession Was Brought to an End), which decomposes the impacts of fiscal and monetary policy in preventing another depression. Turns out both were monumentally important, and there is a large, positive interaction effect between the two: expansionary monetary policy and expansionary fiscal policy are mutually reinforcing in a depressed economy. Their counterfactual for no government intervention: unemployment 5.5 percentage points higher, GDP 6.6 percent lower, and payroll employment 8.4 million jobs lower in 2010 than under our actual policy responses. So fiscal policy was instrumental in 2010, and the output gap—the relevant metric for evaluating the efficacy of expansionary fiscal policy (see here and here)—was $1.0 trillion in 2010, very much comparable to the $968 billion output gap the economy faced in the second quarter of the year. As Bivens points out in this briefing paper, fiscal expansion remains the most effective policy lever for boosting growth and employment.