The Truth About Spending And The Stimulus

Republicans regularly criticise Obama’s stimulus plan, claiming it was an ineffectual waste of money. The internet is full of people arguing it failed to work, that unemployment is still high and growth is low. However what few people realise is that the stimulus did work. Without unemployment would be higher and growth lower. In fact the only problem is that it was too small to solve the greatest crisis since the Great Depression.

There is near unanimous consent among economists (as opposed to bloggers) that the stimulus worked. In a survey 80% agreed that unemployment was lower due to the stimulus, while only 4% disagreed. Analysis by the Congressional Budget Office (CBO) estimated that the stimulus added an extra 3.3 million jobs to the economy, increased GDP by 4.1% and cut the unemployment rate by 1.8% in 2010. Without the stimulus, unemployment would have reached 12%. An examination of the nine main studies on the effect of the stimulus found that six found it had a significant positive effect, one found it had a slight effect and two found it had no effect.

The consensus among economists is that the stimulus improved the economy

Almost all economists agree the stimulus made the economy better off

Even economic advisor to John McCain, Mark Zandi, praises the stimulus. He argues that federal intervention in the form of the stimulus and the bank bailout saved America from a second Great Depression. He said “We would be in a measurably worse place if not for the stimulus. I don’t think it is any coincidence that the great recession ended [i.e., the economy stopped contracting] at precisely the same time that the stimulus . . . was providing its maximum economic benefit.”Chief economic advisor to McCain, Douglas Holtz-Eakin also acknowledged the effect of the stimulus: “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.”

Most of the decline in jobs occurred before Obama had time to do anything. The stimulus did stem the losses and begin growth

An examination of the data shows that the recovery began shortly after the stimulus was passed (obviously allowing some time for it to take effect), but just as crucially the economy began to slip back once the stimulus effects wore off.

The stimulus boosted GDP. Notice the drop off as the stimulus wore off and spending was cut

The stimulus halted the rise in unemployment

The stimulus boosted employment

. . . and production . . .

. . . and the stock market . . .

. . . and personal income . . .

. . . and business investment (you probably get the point by now)

The stimulus also boosted corporate profits. If Obama is a Socialist then why are profits at an all time high?

Almost all indicators show a boost after the stimulus was passed. The stimulus caused a rise in GDP, industrial production, employment, the stock market, personal income, business investment and corporate profits. The claim the stimulus had no effect is not based on reality. These charts also defeat any claim we should cut taxes for the rich or businesses. It is claimed if they have more money they will invest more and create prosperity. But profits and the stock market are booming but this hasn’t trickled down to the rest of the economy.

Critics of the stimulus point to this chart claiming it is proof the stimulus failed. However what they ignore is that it was produced in 2008 before anyone realised quite how bad the recession would be. At the time the Bureau of Economic Analysis estimated the economy would contract by 3%, it actually contracted by 9%. All analysts underestimated the effect of the recession, pointing this out does not prove the stimulus didn’t work.

This chart is used to try to claim the stimulus failed. All it shows it that the scale of the recession was underestimated

Obama made two crucial mistakes in his stimulus. Firstly he tried to be bipartisan. Half of the stimulus was composed of tax cuts, despite the fact economists agree these have far less effect on the economy than government spending. This was because Obama naively believed that the stimulus could be something Democrats and Republicans could unite around. He tried to put partisan division to one side and focus on uniting the country. He believed that in a national crisis the country should unite instead of scoring political points. How wrong he was. Obama’s decision to remain above the political fray meant he didn’t counter criticism of the stimulus. He just presumed everyone was in agreement about its necessity. But he didn’t count on the Republican Party taking an extremist line and making ludicrous claims (they accused him of being a socialist, Muslim and setting up death panels). He also failed to sell the stimulus. Many of the people who have gained from it, either from extra work or the tax cut aren’t actually aware of this fact. Obama felt a national crisis wasn’t the place for electioneering, the Republicans lacked such scruples.

Secondly he was over optimistic. He tried to bring hope to people and ended up making claims about the economy he couldn’t fulfil. He predicted recovery too soon, something his opponents quickly jumped upon.

Thirdly the stimulus was too small. This was the greatest crisis since the Great Depression so it needed a massive rescue plan over several years. It couldn’t be solved in a single year. The economy was crashing, it would be naive to expect a quick and easy solution. While the Federal government was boosting the economy, state and local government was cutting back which acted as an “anti-stimulus” and undid a lot of the good the stimulus did.

The effect of the stimulus was partly offset by local and state government firing workers (the blip is due to hiring extra workers to take the census)

Now I’m sure a lot of people are probably shocked at this. Isn’t Obama always described as the biggest spender in American history? How can it be claimed he didn’t spend enough? The truth is Obama increased spending the least out of all the Presidents in the last 60 years. Just in case you didn’t read that right, let me repeat it, OBAMA INCREASED SPENDING THE LEAST OUT OF ALL THE PRESIDENTS IN THE LAST 60 YEARS! (I hate sentences in capitals but I think this is an appropriate exception). The chart below does not take inflation into account but even if you did Obama actually DECREASED spending! (albeit it by 0.1%) Only Eisenhower increased spending less. Even the Wall Street Journal concedes this point.

Obama has the lowest growth in spending in 60 years

In fact Obama decreased the size of the deficit! (I’d expect most people to be in a state of shock at these facts, but they have been fact checked and they are true). Obama has cut the deficit by $312 billion and plans to cut it by $500 billion by the end of his first term. The deficit was $1.4 trillion when Obama took office, it fell to $1.2 trillion, a drop of 22%, with further plans to cut it by 35% by 2013.

Obama has cut the deficit

Now all of this probably sounds very strange and you’re probably wondering why this is the case. The reason is that the deficit is mainly due to a collapse in revenue rather than a rise in spending. The Bush tax cuts are the single largest cause of the deficit. Secondly, the way the federal budget works is that it is passed a year before it comes into action. So the budget in Obama’s first year was actually passed by Bush. So while that included a spending increase, it was passed by Bush not Obama. It was Bush not Obama who bailed out the banks and he even enacted a part of the stimulus.

The main causes of the deficit are tax cuts and wars

So in truth the stimulus created millions of jobs, ended the recession and began the recovery. It boosted the economy and if it had been followed up on, America would be in a much better position. Obama is not spending like a drunken sailor but is really as tight-fisted as a frugal spinster.

1 Comment

Filed under Economics

One response to “The Truth About Spending And The Stimulus

  1. Ben

    Very well done. This is such comprehensive post and unites of the relevant material together in a way that anticipates how critiques would respond.

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