The Obama Administration’s claim that the fiscal stimulus package is working, in the sense that it is providing the basis for a sustainable economic recovery, sits oddly with the facts. At the time that the fiscal stimulus was introduced earlier this year, the Administration expected that, with the fiscal stimulus, unemployment would decline from a peak of a little over 8 percent in the third quarter of 2009 to around 7 percent by mid-2010. Today, even President Obama acknowledges that unemployment is soon likely to be in double digits while most forecasters expect that unemployment will remain in the region of 10 percent through most of 2010.

            More disturbing still is the fact that despite a sizeable boost to disposable income from tax cuts in the second quarter of 2009, household consumption actually declined by around 1 percent in that quarter. Since the stimulus’ tax cuts were almost entirely concentrated in the second quarter of 2009, this has to throw into question whether we will get any meaningful rebound in household consumption in 2010, which would seem to be a necessary condition for a sustainable economic recovery. This is especially the case since one has to expect that the large gaps that have been allowed to develop in the labor market will exert downward pressure on household incomes that going forward will not be offset by further tax cuts. Further constraining consumption will be the attempts by households to repair balance sheets damaged by the US$12 trillion that has been destroyed in US household wealth.

            The degree to which unusually large gaps have been allowed to open up in the US labor market highlights how ill-designed was the Obama fiscal stimulus package. If the purpose of the US$780 billion stimulus was indeed to jump-start the economy, one has to ask why only around one third of that package was concentrated in 2009 when the economy most needed support. One also has to ask how much economic sense it made for the fiscal stimulus to rely so heavily on the sort of temporary tax cuts that were seen not to have worked in 2008 and why the package was allowed to be so laden with pork that was sure to result in very little bang being obtained for the buck.

            A particularly unfortunate consequence of the Obama Administration’s botched 2009 fiscal stimulus package will be to complicate the prospect for any further fiscal stimulus in 2010. Sadly, the need for a second stimulus is all too likely in the event that the economy indeed experiences a double dip later in the year as consumer demand remains weak.

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The analysis by Cogan, Taylor and Wieland is extremely credible and balanced. This package never made sense as a stimulus, and obviously has not and will not stimulate growth.The speech by Christie Romer reflects her position in the Obama Administration and should not be taken as a scientifically based opinion. If you doubt me, just look at the CEA's unbelievably high estimates for growth over the next decade. Of course, some will say that it is hard to hold any of that against her; the mission of the CEA in recent times seems to be little more than to put lipstick on the pig of bad economic policies, and the last time a CEA chair spoke truth to power he was forced to resign.

It is probably impossible to PROVE at this point that the stimulus is or is not having a big effect.  Cogan et al clearly are taking the position that it did not have an effect -- any effect, it seems -- and they are marshalling the set of arguments that can be used in support of that claim.  I personally tend to view the evidence differently and reach a different conclusion, as follows, but I don't claim that I can PROVE that my  conclusion is right.

First, it looks like consumer spending went up in the spring of 2009, despite the fact that the stock market was cratering then. It is hard to think of what would cause that besides the stimulus package.  Moreover, CBO has a 2008 document that shows that even if 40% of the 2008 tax cut had been consumed, the time path of consumption relative to income looks almost exactly like the graph that Cogan, et al claim is proof that there was no effect. So, at the very least, their "proof" is weak, and it is not consistent with micro evidence by Broda and Parker that finds significant spend-outs from the 2008 tax cuts. By the way, the 2009 tax cut was not like the 2008 tax cut in two respects -- 2009 is paid out in dribs and drabs (via change in withholding)  rather than as a lump sum, and 2009 is part of what is likely to be a longer-term Obama tax cut (Make Work Pay was a part of his campaign proposals, on a permanent basis)  whereas 2008 was a one-time cut. Both differences imply that people are more likely to spend out of the 2009 tax cut, part of the stimulus package, than the 2008 tax cut.   

Second, state and local purchases went up in the second quarter, stimulating GDP directly. It is hard to see how that could have happened without the sizable aid to states that was in the stimulus package, given that states'  financial conditions were getting worse.

Third, federal purchases went up, further stimulating GDP directly. Again, a stimulus effect.  

Fourth, by looking at the individual components but not the overall effect, the authors may be looking too closely at the trees and not enough at the forest.  It is possible that the fact that the Administration indicated that it would not stand by and let the economy collapse had an effect on people's expectations  and behavior -- above and beyond the actual dollar flows of spending increases and tax cuts -- and in particular that the expectational effect would have an effect BEFORE the associated dollar flow direct effects occur.  If so, one would expect that investment, which is probably the most forward looking of any of the components of GDP, would respond favorably and that is indeed what happened.   Expectational shifts are a big part of the macro models that Cogan et al discuss, and could have played an important role.   

Fifth,  a variety of other models -- like those of Goldman Sachs, Macro Advisers, Economy.com -- seem to be finding substantial impacts (the 2%-3% point increase that the Administration claims). I am not saying the other modelers are right, but I am saying I don’t see the Cogan et al explanation for why the other modelers -- who make their living building models, by the way -- are so necessarily and completely and unanimously wrong. Cogan et al try to frame it as themselves against the Administration, but in fact other modelers seem to take the Administration side on this.

Sixth, there is evidence, put out by CEA, but I believe to be sound, that countries that had bigger stimulus packages have done better in the last two quarters than those that had smaller packages.

So, to me, it looks quite plausible that the stimulus has had a significant impact, consistent with those emphasized by many of the leading industry models, consistent with much of the economics literature, and consistent with several key facts noted above.  The passage of time will generate more data that will allow more nuanced tests and may be able to bring about more of a consensus.
 

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