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A weak argument against the stimulus

at 11:49 AM ET, 09/16/2011

Reuters’ conservative economics columnist James Pethokoukis is a good read — both at his blog and on his Twitter account — so I was looking forward to his longer take on whether President Obama made the recession worse. I was also, more selfishly, looking for ideas. I’m working on a piece of my own about the economic crisis and hoped Pethokoukis had found fertile theories or counterfactuals that I could explore. But this is a very weak effort.

Associated Press
Pethokoukis begins with a big claim: “Instead of saving us from a Greater Depression, the Obama stimulus (together with his health-care plan and financial reforms) was a two-year waste of precious time and money that may actually have impeded economic growth.”

That goes further than even the stimulus’s most ardent detractors tend to tread. As Doug Holtz-Eakin, chief economic adviser to John McCain during the 2008 campaign and current president of the American Action Forum, told me, “the argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong. If you throw a trillion dollars at the economy it has an impact, and we needed to do something.”

Holtz-Eakin, of course, is no fan of the American Recovery and Reinvestment Act. He thinks the stimulus was poorly designed and ineffectively managed, and believes it worsened partisan divisions in the Congress by including a grab-bag of dormant ideas that Republicans had long opposed. But that’s a far cry from saying that it pushed growth in the wrong direction.

So what evidence does Pethokoukis offer for his position? Almost no evidence, actually. And what he does have calls the rest of the article into question.

Pethokoukis’s first argument is that the White House’s “own economists predicted the stimulus would prevent the unemployment rate from hitting 8 percent. But the rate actually rose as high as 10.1 percent, has settled in above 9 percent now, and even Obama’s own team currently hopes for a rate of, at best, 8.25 percent by the end of 2012.” This is, of course, a reference to the infamous Bernstein-Romer paper (pdf). And though it’s fine as a politician’s dishonest soundbite, it’s disqualifying for a serious economic commentator.

The Bernstein-Romer calculations were conducted in December 2008 and released in January 2009. In December 2008, the Bureau of Economic Analysis was projecting (pdf) that in the fourth quarter of 2008, the economy would contract at a 3.8 percent annualized rate. That would later be upgraded to 6.2 percent, and then, earlier this year, to 8.9 percent. In other words, Bernstein and Romer were building their estimates — and their policy — off numbers that underestimated the economic contraction in the fourth quarter by 5.1 percent of GDP.

And they weren’t alone. Every private-sector forecaster — from Macroeconomic Advisers to Moody’s to Goldman Sachs — was making the same mistake. In December of 2008, no one had any idea how bad things really were. Indeed, we didn’t really know the depth of the damage until a few months ago, when the BEA updated its estimates.

The bottom line is simple, and it need do no damage to Pethokoukis’s case: In the fourth quarter of 2008, our economic inputs were wrong. So forecasts using those inputs to make predictions about the future produced answers that were also wrong. That says nothing about whether the stimulus worked or failed. It’s like questioning modern medicine because a case of pneumonia initially presented as strep throat. The recession could have been more than twice as deep as anyone thought in late-2008 and, separately, stimulus is a failed policy idea. But the fact that the initial projections were wrong can’t form the basis for your case.

(In general, I have actually found this to be a useful test: When economic commentators use this argument, I know not to take them seriously, because they either don’t know the facts or aren’t letting them stand in the way of their argument.)

Pethokoukis certainly knows these facts. He just chose not to mention them — even to attempt to refute them — in his article. That calls all the rest of it into question. And his second piece of evidence suffers from much the same problem.

To be sure, Pethokoukis’s second argument is far superior to his first: he quotes an analysis by John Taylor, a Stanford economist, which attempted to measure the extra spending — as opposed to the net paying down of debts — induced by the stimulus, and found little effect. Case closed?

Not really. A few months ago, Dylan Matthews and I attempted to do a comprehensive job on the subject, asking an array of economists from both sides of the aisle which studies they found most persuasive and then summarizing those studies, as well as their methodological strengths and weaknesses. We ended up with nine studies — including Taylor’s — and 4,877 words of summary. It was not an easy task.

And as far as I can tell, it’s not a task Pethokoukis even attempted. Dylan and I found that of the nine serious efforts to estimate the stimulus, six found substantial positive effects, two found no effect, and one found a slight effect. Taylor’s paper was nowhere near the most convincing of the bunch, and Taylor, a longtime spokesperson for Republican economic policies, is not the most convincing messenger, either. But Pethokoukis neither attempts to deal with the flaws in Taylor’s study — he gestures toward one of them and then misuses a quote Larry Summers gave me about “shovel-ready” infrastructure projects — or the contrary results in, say, Feyrer and Sacerdote.

That’s ... it. Pethokoukis’s case against the stimulus relies on misleading his readers about what was wrong with the administration’s initial economic estimates and cherrypicking one negative study on the stimulus. Obama’s detractors deserve a better class of takedown than this, and so too do his defenders.

I would actually like to read a really smart, really rigorous effort to argue that a radically different strategy over the past few years would have led to radically different results. But this isn’t that piece. This is an effort to convince those who are already mostly convinced. And that’s not good enough. I don’t mean to spend so much time picking on Pethokoukis. But it’s precisely because I enjoy his work that I found this so disappointing.

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