Economic Stimulus: So, Is It Working?

That's the title of a speech (PDF) given by Council of Economic Advisors head Christina Romer last night, addressing the effectiveness of this year's stimulus act. Her answer: "absolutely". Not particularly surprising, but Mrs Romer does offer support for the proposition. For starters, she presents the results of forecasts for output and employment in the second quarter of 2009 using data through the first quarter and compares those results to what was actually observed, with the stimulus:

The baseline forecast implies further substantial job loss in the second quarter. Indeed, the implied average monthly decline is nearly 600,000 jobs.What you see is that actual job loss...came in substantially lower.

These calculations imply that employment is now about 485,000 jobs above what it otherwise would have been during the second quarter of 2009. This number is very similar to Mark Zandi’s estimate that stimulus added roughly half a million jobs over the second quarter, relative to what otherwise would have occurred...

Past history predicts that real GDP would continue to decline at a substantial rate in the second quarter. The projected decline (at an annual rate) is 3.3%, substantially worse than the actual decline of 1%.

This way of specifying the baseline confirms that something unusual happened in the second quarter: GDP growth was 2.3 percentage points higher than the usual time-series behavior of GDP would lead one to expect.

Private forecasters across the political and methodological spectrum attribute much of the unusual behavior of real GDP to the Recovery Act. This table shows that analysts estimate that fiscal stimulus added between 2 and 3 percentage points to real GDP growth in the second quarter.

Mrs Romer also discusses the results of a cross-country analysis of stimulus effects, which shows a positive effect ("on average, a country with stimulus that’s larger by 1% of GDP has expected real GDP growth in the second quarter that’s about 2 percentage points higher relative to the November forecast"), and of a cross-state analysis (comparing stimulus funds received to job losses), which again shows the expected relationship.

The numbers aren't perfect and others will disagree with the assessment, as she acknowledges. A quick reading of the figures, however, seems to show some positive contribution to output and employment from stimulus, even at this early stage of the programme.

(Via Tim Fernholz.)

original post

Comments

[CautiousInv...:]

In this instance, the unemployment losses make a case for effectiveness of the stimulus package.

Had the actual numbers come in much worse, they would have said the baseline underestimated the severity of the recession and without stimulus things would have been worse.

Aug 07 08:55 AM

[jay brebner:]

Obama came in more prepared than any president since Johnson and maybe Reagan. He's a black man - he had to be more prepared. He may end up being the Jordan of politics if this continues. The revisions of Unemployment #s really helps just when he needed them. Dems will consolidate their power soon after they return from recess and get a HC reform bill passed. Then cap and trade in the spring?

Will the bears (me included) give up today? - quite likely. The appearance of effective leadership matters.

Aug 07 09:19 AM

[Living4Divi...:]

If you throw enough money at the economy, the stimulus will eventually work. Look at cash for clunkers and the massive bank bailouts.

The problem is that we will eventually have to pay for all of this later.

Aug 07 10:28 AM

[Relative Le...:]

The "stimulus" won't work becuase it will never be enough to offset the decline in spending from the baby boomers.

Here's some interesting stats on the "entitlement" generation:

- $400 billion - Amount that will come out of annual U.S. consumption as boomers push the savings rate from 1% to 5%.
- 69% - Portion of boomers aged 54 to 63 who are financially unprepared for retirement.
- 47% - Boomers' share of national disposable income in 2005...they only contributed 7% of national savings.
- 78% - Boomers' share of GDP growth during the bubble years of 1995 to 2005.

Here's a great article about the Leaner Baby Boomer Economy (Business Week):

consequencesunintended...

A "V-Recovery" seems almost impossible...

Aug 07 11:18 AM

[Mad Hedge F...:]

Love that Christina. Looks like I am going to have to be the designated driver on this one. The Friday nonfarm payroll showing losses of only 247,000, with upward revisions to May and June, is signaling to many that the bull market is back. You might as well put a giant neon sign on your roof saying “party here tonight.” One can never underestimate the animal spirits here. I’m sure the newspapers are going to call the 0.1 % micro improvement in the unemployment rate to 9.4% as the beginning a major trend. But I don’t see any consumer spending on the horizon, and I was able to breeze through my favorite restaurant at lunch because it was still half empty. I think what is really happening here is that having priced in Armageddon in March, we are now pricing it back out. What’s an Armageddon worth? Some 3,000 Dow points, or 350 S&P 500 points, where we are right now, sounds like the right price to me.Let me know when you’re ready to go home, and I’ll pile your inebriated carcasses back into the car. I’ll even take the breathalyzer test.

Aug 07 12:34 PM

[Larrysyr:]

Averting armageddon was the point of all that government action. I'll venture that it was worth doing just to put a floor under the crash.

The hard part now will be building a sustainable recovery. The economy to come will not look like the ultra-consumer economy we just ended, but the prospects for something better than the last year are brighter today than they have been in a long time.

Mad Hedge is right that the market's rise was correcting out an overreaction to the situation in March. At its current level, it is hardly a robust sign.

Aug 07 01:18 PM

[David Van K...:]

Looks like we don't have to wait for what the newspapers say. The markets are speaking without waiting (up 2% as I write this). If Armageddon was priced in, and has now been avoided, pricing it back out seems like the right thing to do, no? Care to share with us how you computed your "price of Armageddon" numbers? Are they more than just a guess? What if (gasp) the economy actually turns from it's "less worse" mode to measurable expansion? What's that worth? Another couple thousand on the Dow, couple hundred on the S&P?

Doesn't matter right now. Consumer spending and returning to sustainable private-sector growth are correctly identified as the keys to a sustained economic recovery and continued market growth. Right now (and since March 10), the markets have been acting as if those things are achievable. This is typical mid-to-late recession behavior for the markets, no real surprise except to government bashers, conspiracy theorists, and perma-bears. No party necessary, just enjoy the trend while it's here helping undo some of the damage of the 2007-2008 crash.

Aug 07 02:30 PM

[casummers:]

After the Stimulus was signed Obama proclaimed it would work "immediately" and cap unemployment in the 8% range. In early July, with a larger than expected jobless number and the market sinking, the Administration put out a full court press saying "The stimulus was never intended to work this fast." Now, with things on the upswing, Romer tells us it is "absolutely working." They are looking at the numbers and manipulating their talking points in accordance.

The play book all along was to position themselves in a manner that they could profit from any natural recovery and pass the blame for any continued downturn, while still funneling billions to their major donors. It would be laughable if people weren't so willing to buy into the inconsistencies

Aug 07 04:40 PM

[Mr. Ed, Jr.:]

Fundamentals don't matter any more, so just party like it's 1999.

By the way, wasn't that about the same year we had the last "Fundamentals don't matter anymore " party ?

Banks are broke, CRE is collapsing, unemployment rising (Less worse...ha !) consumer out of money, credit, homes, savings and jobs, government issuing new piles of money daily to try to soak up the mess, YOY almost everything is worse (but any small monthly "less worse" scenario sends markets soaring), dollar falling, states are bankrupt and raising taxes, pensions are now massive underfunded liabilities, Congress and Obama trying to impose biggest tax in history of the world on energy, while adding another trillion in debt with nationalized health care...

But our government said they're going to make some rich guys pay for all of this, so no worries.

Party on, dudes !

Aug 08 04:01 AM

[Gregman2:]

The real number to look at is the velocity of money and it's not much improved.

Aug 08 11:57 AM

[mac123449:]

blue horse shoe loves JPM

Aug 08 12:38 PM

[RiskReturnO...:]

The real stimulus is 0% fed funds rate ...

which provides a steep yield curve that helps banks earn easy money while waiting for charge-offs to stabilize ... each month that goes by where unemployment rate gradually rises to any peak below 10.4% will be fine for the banks as stress test "adverse" scenario is already modeled in for tangible common equity ratios ...

likewise, any hint of inflation will drive investors away from 0% money market funds into anything that holds value -- commodities, foreign currency, TIPS, etc ...

best investment now include: TBT as hedge for rising yields, DBV to protect against falling dollar, and DBA / XLE as play on commodities.

Aug 08 01:20 PM

[bcncv:]

The real interesting question is whether congress will stop the stimulus spending once it's clear that the economy is recovering.

I remember listening to the finance committee promise to be fiscally disciplined when it was time to cut off the spigot. I wonder if they'll keep their word on that?

Aug 08 09:07 PM

[been there:]

if govt stimulus worked the soviet union would be going strong

Aug 08 09:25 PM

[Anthony Alfidi:]

The stimulus is most definitely *not* working. The sugar rush of increased transfer payments will leave the U.S. with a hangover of more debt to pay off later - with higher taxes and inflation!

Aug 09 03:37 AM

[VB:]

If anyone know exactly how how of the stimulus package have been spent so far? THks!

Aug 19 09:49 AM