Let’s be clear about what’s going on here. The economy that Obama inherited was much worse than most forecasters were predicting at the time of the CEA analysis. The administrations forecasts were informed by blue-chip forecasters, which, in hind-sight, were much too optimistic. Mankiw correctly notes that there is a “shifting baseline” problem, and that the actual unemployment outcome could be the result of incorrect forecasts and/or a changing landscape. (Here’s a dramatic illustration of the systematic errors of the Blue Chip forecasters.)

The recovery act has already helped create and save jobs, and will continue to do so as more money is outlayed.  The fact that the economy is so much worse than everyone was projecting is not a reason to abandon the effort before it really gets going, but rather it is a reason to begin to think about what more needs to be done to make sure that employment rebounds as quickly as possible and to make sure that people can weather the storm.

President Obama pressed for and achieved an $800 billion economic "stimulus" package largely consisting of increased federal spending on traditional liberal priorities. The President argued that this stimulus would "create or save" 3.5 million jobs and his economic advisors predicted that without the stimulus unemployment would rise to 9 percent by 2010.

Congress passed the stimulus bill in February 2009 and over $50 billion in stimulus spending has already been paid out with another $100 billion made available by federal agencies. Asked when the public should begin to judge the effects of the stimulus, White House Press Secretary Robert Gibbs said, "I think we should begin to judge it now."

Unfortunately unemployment continues to rise. Not only has unemployment risen above what the President's advisors predicted would happen if the stimulus passed but – at 9.5 percent in June – it has risen above what they estimated would occur without the stimulus.

Nonetheless the President has repeated his claim that the stimulus is creating and saving jobs. He recently claimed that the stimulus bill has already created or saved 150,000 new jobs and that it will "create or save" another 600,000 jobs by the end of the summer.

The President can make these claims because it is impossible to measure how many jobs the stimulus has saved. His advisors predicted significantly fewer job losses would occur if the stimulus passed but they can now claim – as Vice President Biden recently did – that they underestimated the severity of the recession, but that the stimulus is still “creating and saving” jobs. No matter how badly the economy performs the President can always claim that 3.5 million more jobs would have been lost without his policies.

This is deliberately amorphous, giving the pretense of accountability without the substance. No matter how the economy performs the President will claim the stimulus has succeeded in “saving” jobs.

Analysts and the media should not permit the administration to so easily evade responsibility for the success or failure of the stimulus. $800 billion is an enormous amount of money – roughly the size of the entire Australian economy. Though the Bureau of Labor Statistics cannot measure jobs saved, it does measure a related figure: job loss rates. If the stimulus bill has prevented jobs from being lost, the monthly job loss rate would be expected to decline. If the job loss rate has stayed the same or increased, then the President cannot credibly claim that the stimulus saved jobs.

Two different surveys measure job loss rates: the Current Population Survey (CPS) and the Job Openings and Labor Turnover Survey (JOLTS). The CPS is the survey used to calculate the unemployment rate and reveals the proportion of employed workers who lose their jobs and become unemployed each month. The JOLTS directly measures job turnover, and JOLTS data reports the proportion of workers who involuntarily leave their jobs each month.

Both measures show that job loss rates increased sharply since the start of the recession and that they have not fallen since President Obama signed the stimulus bill. The JOLTS reports that in February, 2.2 percent of workers involuntarily left their jobs. By April 2009 (the most recent data available), that figure rose to 2.3 percent. The CPS reports that 1.9 percent of workers employed in January 2009 lost their jobs in February--a figure that remained unchanged in June.

Despite the decline in net job losses, employed workers are just as likely to lose their jobs today as before the stimulus became law. The stimulus has not measurably affected job loss rates. Nothing in the data shows that the billions of dollars spent on the stimulus has--in the aggregate--saved jobs that would have otherwise been lost. The White House says that the American public should begin to judge the effects of the stimulus now. In that case, the stimulus has so far failed.

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One has to be struck by the degree to which the Obama Administration has underestimated the depth of the current economic recession in setting economic policy at the start of its term. Whereas in January 2009 the Obama Administration thought that its fiscal stimulus package would prevent unemployment from rising above 8 percent, already by June 2009 unemployment has risen to 9.5 percent. Worse still, the rate of decline in overall hours worked is yet to show any sign of moderating, while the Administration itself recognizes that unemployment will peak at above 10 percent of the work force.

The degree to which unemployment already exceeds the unemployment forecast on which the Obama Administration’s economic policies have been premised has to raise serious questions about the adequacy and appropriateness of those policies. First, it must raise questions as to how much sense it made to have only one third of the US$780 billion fiscal stimulus package come into effect in 2009, the year in which fiscal stimulus was most sorely needed. Similarly, it has to focus attention on how poorly designed was that fiscal stimulus package from the point of view of getting the most bang for the buck and how laden it was with pork.

Second, questions now have to be raised as to whether the Administration is being overly sanguine about the health of the financial system and about the amount of support that the financial system still needs. It now seems all but certain that unemployment will rise significantly above the worst case scenario of the Administration’s recent stress test for the 19 major banks, which has to imply larger than expected loan losses at those banks. And third, one has to wonder whether the Administration’s efforts to stabilize the housing market are nearly sufficient given that a higher than expected unemployment rate will certainly exacerbate the country’s foreclosure crisis.

The very real risk of wage and price deflation now posed by very much larger than expected gaps in the labor and output markets would suggest that it is not too early for the Administration to go back to the drawing board to strengthen its policy approach. At the very least, the latest dismal employment figures should put paid to any thought about an early exit from stimulus measures.

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For people who do not make their living as economic forecasters, it is hard to make an informed critique of the forecasts prepared by an Administration. Like other observers, I was surprised last winter by the apparent optimism of the Administration and Federal Reserve economic forecasts. It seemed to me (and to others) that the severity of the financial crisis and the sharp drop in asset prices signaled the onset of a downturn that would be much worse than average. The potential severity of the recession did not appear to be reflected in the Administration’s or the Federal Reserve Board’s short- and medium-term forecasts. In the Administration’s January forecast, for example, the peak quarterly unemployment rate, even without an economic stimulus package, was predicted to be 9.0 percent. In the just-completed April-June quarter, the actual unemployment rate averaged 9.2 percent, and it is still rising.

The Administration was not alone in publishing a forecast that turned out to be too optimistic. In its January 2009 forecast, the Congressional Budget Office predicted that the unemployment rate would average 8.3 percent in 2009 and 9.0 percent in 2010, assuming no economic stimulus package was passed.  As CBO pointed out in that report, its outlook was more pessimistic than that of private forecasting firms.  Under the more pessimistic CBO forecast prepared in March 2009, after Congress passed a large stimulus package, the annual unemployment rate at the trough of the recession was still predicted to be 9.0 percent, a rate that is one-half percentage point below the 9.5 percent monthly unemployment rate actually recorded in June 2009. The Administration and the CBO can defend their winter forecasts by pointing to the predictions of other professional forecasters, few of whom foresaw the severity of the current recession.

As I noted in an earlier comment in this forum, the optimism of the Administration’s winter forecast carried a real political risk. By forecasting a milder recession than the one that we actually experienced, the Administration could add fuel to its opponents’ claims that the stimulus package and other Administration policies are failing. Voters might wrongly conclude that the shortfall in economic performance is due to the Administration's own policies, including its tax and spending policies and its handling of the banking crisis. This view is wrong, I think, because the recession was likely to be worse than predicted by the Administration and most private economic forecasters. The depth of the recession is partly explained by serious policy errors, but the errors were committed by an earlier Administration, not this one.

In making economic forecasts, an Administration faces a tough choice. If its forecast is considerably more pessimistic than the consensus outlook of private forecasters, it can be criticized for trying to take policy credit for economic performance that exceeds its too-pessimistic forecast. If its forecast is too rosy, it can be criticized for understating the future deficits implied by its policies. What matters in the current recession is the identification and adoption of policies that will improve the economic outlook. Are the Administration’s policy prescriptions correct? If they are adopted, how much will they affect the economic outlook?

The plain fact is the even the best economic forecaster cannot reliably predict the future course of output, private consumption, or unemployment. Those forecasts therefore provide a very uncertain guide for determining whether an Administration’s policies have succeeded or failed. The fact that the economy has turned out to be weaker than predicted by earlier forecasts actually strengthens the case for adopting the counter-cyclical policies proposed by the Administration. If the economy continues to deteriorate, it will strengthen the case for another dose of fiscal stimulus as well.

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Greg Mankiw points out that passing legislation to take $787 billion dollars from people who earned it--in debt or taxes--and giving to it politically favored groups damages the overall economy, reduces investment and kills job creation. This should be a surprise to no one. If the State spending other people's money could increase employment and wealth and growth, then Zimbabwe would be prospering. East Germany would have worked and the Great Depression would not have lasted more than a decade.

Imagine if Obama, Reid and Pelosi all stood on one side of a lake and dipped in three buckets and filled them with water. Then they marched to the far side of the lake and held a press conference with all the major media and poured the three buckets into the lake announcing their strategy of "stimulating" the lake to great depths. If you believe the lake has more water at the end of this process than before, you would expect the Reid/Pelosi/Obama plan to work.

Politically spending money that had been or would have been saved destroys wealth and job creation. It does build up a political machine in a city like Chicago or a nation being turned into a large version of Chicago.

First, let's remember that the economic crisis was inherited by this Administration and a major cause of the crisis was a failure to regulate the financial sector correctly in the prior eight years, especially the last few years of the Bush Administration. The Obama Administration has reacted correctly by enacting a major stimulus package and, together with the Federal Reserve, moved aggressively to sustain the banking system. Christina Romer made a good estimate of the impact of the stimulus package, looking at the number of jobs that would be added by the package compared to the counterfactual of the number without a stimulus package. As we all know, it is very hard to forecast the future path of the economy and very hard to forecast the impact of any stimulus package. Because economic policymakers have to make decisions under uncertainty, economists do the best they can to say what will happen if no policy is enacted and the impact of policy if it is enacted. No one should expect the predictions to track exactly the actual outcome, especially in this extremely uncertain time. The Administration's stimulus package was a good one. It has rolled out more slowly than would have been ideal, but the good news is that its main impact is still to come. Economic policies take time to work. Let's give the current policies a chance.

Sniping at the Obama Administration's policies after they have been in office six months and are dealing with the calamitous recession bequeathed by the previous Administration, seems a bit much. Mea culpa's might be more appropriate from those who supported the bad policies that contributed to the mess we are in.

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Greg Mankiw's diagram showing the inaccuracy of the Obama Adminsitration's employment projections is wonderfully illustrative, but no surprise. The boondoggle "stimulus" package was a waste of money that never had a credible chance of preventing the short-term rise in unemployment and worsening of the recession in 2009. It was the prime example of what the Obama Administration calls "using the crisis" as an excuse to justify passing long-term measures (and the requisite pork it takes to pass them) that are really intended to permanently increase the scope of government and to redestribute wealth ("spreading it around"), which are its core objectives. Even under its own projections at the time the package was passed, the thrust of the Obama spending initiatives will not take hold until after 2009. As Robert Samuelson and many others (myself included) noted at the time the bills were passed, if Obama and the Dems in Congress had wanted to prevent a run up in unemployment, they would have focused on measures with immediate impact, such as cuts in marginal tax rates (many experts suggested a cut in the payroll tax for several years, as a substitute for the politically difficult decreases in marginal income tax rates) and flexible block grants to states to finance programs that the states had prioritized (rather than the inflexible, grants for specific Obama initiatives that can only be implemented with long delays). Stimulus was not the true purpose of the plan, despite the rhetoric to the contrary. Now, Biden and others are pretendiing to be surprised that the "stimulus" isn't stimulating and job losses are rising far faster than the White House had "projected." This disingenuous posturing will not work. And after a few more months, the strategy of blaming their predecessor for the continuing job losses and weak recovery will fall flat, too. Just in time for the 2010 election, one hopes; a major party realignment in Congress looks like the only way of bringing common sense back to government budgeting.

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