Are You Feeling ‘Stimulated’ Yet?

Even before it was signed into law, President Obama's $787 billion stimulus package was denounced as both too big (mostly by the right) and too small (mostly by the left) to succeed. Now, a mere five months later, it's being declared a failure across the political spectrum.

Stanford economist Ed Lazear, who chaired President Bush's Council of Economic Advisers from 2006 through 2009, took to the Wall Street Journal op-ed page Thursday, charging  that the stimulus package has failed and accusing Obama of being a socialist. By late June, he notes, only $56 billion had been spent, and "a large proportion of that actually reflects mere transfers from the federal government to state governments, so the amount that has gotten into the economy is significantly lower." Either way, it's "not enough to make a meaningful impact." (Getting a lecture from Lazear about dealing swiftly with a recession is pretty rich. In the face of rising job losses and a crumbling housing market in 2008, he refused to use the "R" word.) Greg Mankiw, the Harvard economist who also chaired the CEA in the Bush years, has highlighted the gap between the promises the administration made about how the stimulus would affect the unemployment rate and the reality. While noting that it's difficult to hold administrations accountable for forecasts when economic conditions change rapidly, Mankiw nonetheless says that the Obama administration has "not been particularly forthright." (Getting a lecture from Mankiw about candor on this subject is likewise rich, given that his CEA has been charged, convincingly, with conjuring up millions of projected jobs in a 2004 economic report.)

On the left side of the aisle, many of those who deemed the stimulus too small from the outset are now calling for more. The I Told You So Caucus includes Berkeley-dwelling former Clinton administration officials like Brad DeLong and Laura D’Andrea Tyson, Warren Buffett, and Nobel prize winners Joseph Stiglitz and Paul Krugman, plus a whole bunch of other economists tallied by the Center for Economic and Policy Research.

I am not an economist. Still, I am confident in saying that, just as it was absurd to talk about an Obama bear market in March, it's much too soon to be condemning the stimulus package. Last Sunday, Vice President Joe Biden said the administration had misread the severity of the decline. But that's not quite true, either. Rather, the "failure" of the stimulus may have been as much a failure of managing expectations as about managing public works projects.

Perhaps the biggest mistake stimulus proponents made was to suggest that this recession would (and could) end quickly. Modern America is not equipped—financially, socially, or psychologically—to deal with long recessions. We don't have the safety net or the savings to cope with a protracted downturn. And fortunately, we haven't had to. The last two recessions, which ended in 2001 and 1992, respectively, lasted only eight months each. But recessions brought on by financial crises are always deeper and more long-lasting than other recessions, as economists Ken Rogoff and Carmen Reinhardt show in this paper. By  February 2009, when the stimulus package was passed, the recession was already the longest in 28 years; now it's the longest contraction since the Great Depression.

What's more, in the spring of 2009, the chore of restoring the economy to growth was a huge task. The economy was in a death spiral. Between the end of 2007 and the first quarter of 2009, Americans' net worth fell by more than $12 trillion, nearly 20 percent. More than 6 million payroll jobs had been lost. The financial sector was essentially bankrupt. In the fourth quarter of 2008, the economy shrunk at a 6.3 percent annual rate, and in the first quarter it shrunk at a 5.5 percent rate. In a highly leveraged economy with an expanding population and workforce, a few quarters of contraction at 6 percent,,are nigh cataclysmic (note to Michael: -6 is HUGE).