Professional Forecasters Agree: Stimulus Added to Growth
Friday's Wall Street Journal has the latest survey of 54 professional economic forecasters. Among the questions they were asked was this: "What would the real gross domestic product (annualized growth rate) be/have been for the following period absent the American Recovery and Reinvestment Act?"
The average response said that growth would have been -0.93 percent last year in the absence of fiscal stimulus. Since growth was essentially zero on a 4th quarter over 4th quarter basis--the measure favored by forecasters--this suggests that the stimulus added almost a full percentage point to real GDP growth in 2009.
For 2010, the forecasters say that growth would be 2.2 percent in the absence of stimulus. Since the average growth forecast for this year is 3.0 percent by these same forecasters, this suggests that the stimulus bill will add 0.8 percent to growth this year as well. In other words, the real GDP growth rate this year will be more than a third higher than it would be in the absence of stimulus.
On balance, 75 percent of the forecasters said the stimulus bill was a net positive for growth, 12 percent said it was a net negative, and 14 percent said neither.
In terms of the unemployment rate, the forecasters say that the February rate would have been 10.4 percent in the absence of stimulus, rather than the 9.7 percent rate reported by the Bureau of Labor Statistics last week.
This doesn't close the book on whether the stimulus legislation worked or not, but it should be remembered that the economists participating in this survey are not political hacks at some "think tank" or ivory tower academics, but people paid on the basis of being right about forecasting the economy. Their words ought to carry a bit more weight than those that don't forecast for a living.
Note: Menzie Chinn comments here.
Yup
Yes, there would have been growth because part of GDP calculation is government expenditure, hence more government spending more GDP. But since this government expenditure is paid with debt, higher GDP doesn't in itself justify the stimulus package as being a correct action, especially when the future ends up paying for it.
Yepper
But it's not like that money was being poured down a hole. We got new highway work, we got more energy efficient buildings. And on all of the money we paid an interest rate of effectively zero.
Once you accept the principle that debt fueled spending is stimulative in a very harsh recession, there's no end of good arguments as to why this was a situation that called for stimulus.
Not all professionals agree....
But it's not like that money was being poured down a hole. We got new highway work...
You're optimistic. A greatly disporportionate amount of stimulus spending went to governments (as opposed to the private sector) which turned a whole lot of it into higher salaries for government workers. Here in NYC the transit workers union received $350 million of stimulus money for an 11% pay raise.
How many government unions gave up their contractual pay raises to save jobs?
we got more energy efficient buildings.
More energy efficient buildings is one thing we notably didn't get.
The Adminstration's own official estimate is that one job-year is being "saved or created" for each $116,000 of the stimulus. (Presumably they gave themselves the benefit of all their doubts computing that number, but disregard that.) The BLS says the average US wage is $42,000.
Assume the typical marginal job saved-created pays as much as the average job. Is $116,000 added to the national debt and incurring interest forever to create a job paying $42,000 for one year "worth it"? You decide.
And on all of the money we paid an interest rate of effectively zero.
For the moment. But all of that now over $860 billion is going to be rolled over -- mostly quite soon -- and be carried forever. Long-term rates are a projected 6%.
Once you accept the principle that debt fueled spending is stimulative in a very harsh recession, there's no end of good arguments as to why this was a situation that called for stimulus.
Stimulus, yes. Fiscal stimulus that piles up debt, that's questionable. This kind of fiscal stimulus -- slow, pork-ridden, the most inefficent of all -- more questionable.
Actually you mis-frame the issue.
Here's how Scott Sumner clarifies it.
~~ quote ~~~
Everyone wants to set the debate up as follows:
1. Do you favor massive deficits or are you content to have the economy self-correct, risking high unemployment for several years?
[But] that is not the issue. Rather there are two distinct issues:
1. Is more Aggregte Demand desirable, or should we let the recovery take its natural course?
2. If we need more AD, is monetary expansion preferable to massive budget deficits?
Let’s review a few simple ideas. Fiscal stimulus does not boost AS, it boosts AD ... So if fiscal stimulus is to help the recovery, it does so by exactly the same method as monetary stimulus —- boosting AD.
I happen to favor more stimulus, although I understand that some thoughtful economists disagree with me.
I happen to think monetary stimulus is preferable to fiscal stimulus, and in this case there aren’t any thoughtful economists who disagree with me. Not one.
If there was going to be one, it would be Paul Krugman. But even he admitted late last year that monetary stimulus is the first choice, and you only move on to fiscal stimulus is the Fed won’t play ball...
We are running up trillions of dollars in debt precisely because the elected leaders of our country think we need more AD, and the Fed doesn’t.
I understand the need for the Fed to be independent, but how about some honesty at least. If these inflation hawks really believe what they are saying, show some guts and come out and say “We are not doing more monetary stimulus because we feel a need to offset what we regard as excessive fiscal stimulus, and prevent it from raising the expected inflation rate.” If they really have the courage of their convictions, then why not admit what they are doing?...
In February I said fiscal stimulus wouldn’t work, as the Fed had some sort of nominal aggregate target in mind, and was going to simply offset the fiscal stimulus. And that is what happened.
When things looked scary, like a Depression was possible, the Fed announced its big program of buying Treasuries and MBSs.
Later in the year when things picked up a bit, and we were clearly going to avoid a depression, the Fed started furiously back-peddling. They started talking about ending the bond buying program and "exit strategies." Ask yourself this; what does that back and forth behavior tell you?
It tells me the Fed has some sort of implicit nominal target, and if the economy seems to fall short they’ll pull out all the stops and flood the economy with liquidity.
That’s why the $800 billion dollar fiscal stimulus was a complete waste of money; the Fed wasn’t going to allow NGDP to fall much further than the actual 2.5% it fell. Shame on us for not figuring that out, and shame on the Fed for not explaining that to us...
~~~
And don't anyone answer "liquidity trap". As Krugman and Bernanke both long pointed out during Japan's deflation, a government can always depreciate the currency a bit to cure that. And as Romer has pointed out, monetary policy worked potently in the US during the Great Depression amid supposedly the worst liquidity trap of all.
Right now the Fed is cutting back its support for bond and mortgage security markets...
"The big question is how much mortgage rates will rise and how quickly as a result"
... which clearly is de-stimumative!
Yet the fiscal stimulus lumbers on, only, what? half done?
Fed policy is offsetting it.
All the "professional forecasters" evaluate stimulus results assuming ceteris paribus, Fed policy is inert. (How could they do otherwise?) But if the Fed steers to hit its policy targets, and in doing so acts to offset effects kicked up by the stimulus, what's the effect of the stimulus then?