Another Conservative Fails Disastrously At Trying To Debunk The Stimulus

With the economy improving, conservatives are taking a new tack. They’re arguing that the stimulus doesn’t deserve any credit for the rebound, and that all the stimulus left us with is more debt.

We recently got into a debate with Jim Pethokoukis, who rebrandished the infamous Romer Bernstein chart to show that the stimulus failed to do what it advertised.

His basic gist: Unemployment is way higher now than what the Obama White House projected, ergo the stimulus and Keynesian central planning failed. The problem with his argument: This chart was produced in January 2009, when our guesses for the contraction were way too conservative (at the time, they thought Q4 2008 GDP probably fell by around 3 per cent, when later we learned that it had fallen around 9 per cent). Thus the problem wasn’t the stimulus or even the model, but our inputs, due to the fact that it’s really hard to measure an economy collapsing that fast.

romer bernstein stimulus chart

Photo: chart

Anyway, the latest attempt to re-litigate the stimulus comes from Ramesh Ponnuru, whose latest column at Bloomberg View is titled: Obama’s Stimulus Helped Grow Debt, Not Economy.

Ponnuru breaks his argument into three or four parts.

So we’ll break it down, and comment.

First, he notes that a lot of studies which support the idea that the stimulus worked are not based on hard empirical facts, but based on models.

Media fact-check organisations have no such doubts. says it’s “just false” to deny that the stimulus has created jobs. It cites the Congressional Budget Office‘s estimate that the stimulus had saved or created millions of jobs. But the CBO, as its director has explained, hasn’t really checked the effect of the stimulus. It has merely reported what the results of additional federal spending and tax credits would be if you assume that spending and tax credits are stimulative.

This is a fair point. If you think models are nonsense, then a report based on models aren’t going to convince you.

But after this point, Ponnuru’s argument rapidly goes downhill.

He specifically cites as a counterpoint, two reports, both of which ostensibly debunk the idea of the stimulus:

Other research on the stimulus, meanwhile, has uncovered reasons for scepticism about its effect. John F. Cogan of the Hoover Institution and John B. Taylor of Stanford University have found that the federal aid to states that was in the stimulus reduced states’ borrowing. The transfer may have helped state balance sheets, but shifting debt from states to the federal government cannot have been stimulative. The stimulus didn’t increase federal purchases significantly, they said.

Valerie Ramey of the University of California, San Diego, has found that the stimulus didn’t increase economic output or private-sector employment, although it boosted public-sector employment. (Maybe PolitiFact will give these economists a pants-on-fire citation, too.)

Regarding the John Taylor study, it’s not clear at all why “shifting debt from states to the Federal Government cannot have been stimulative.” It absolutely can be! There’s the obvious fact that the Federal Government borrows for less than states can, ergo, you’re saving money by essentially refinancing state debt that way.

What’s more, the federal government wasn’t borrowing- or budget-constrained in any way, whereas state and local governments clearly were and are. The ongoing jobs shed by state and local governments is a testament to the fact that access to funding is a big deal at the state and local level. So really the idea that the government backstopping the states “cannot have been stimulative” does not stand up to logic or facts.

Then in his second study, the Ramey study, Ponnuru admits that the stimulus “boosted public-sector employment.” Now even if you don’t assume any spillover between public-sector employment and private-sector employment, public sector jobs are still jobs, and are still part of GDP and the economy.

So, if in your column saying the stimulus didn’t help GDP you cite a study showing the stimulus boosting jobs, you’ve undermined your argument.

And again, we’re not even including the fact that employed public sector workers spend money, thereby keeping private sector workers employed.

In the final part of Ponnuru’s argument, he tries a different approach, saying that fiscal stimulus can’t work because of the Fed’s desire to keep inflation in check.

Assume, for example, that the central bank has a strict 2 per cent target for inflation and is perfectly effective in hitting it. In that case, any stimulus that Congress provides is and must be canceled out by a tighter monetary policy. Or assume that the central bank always achieves a target of 4.5 per cent growth in nominal income. Again, any added stimulus just causes the Fed to run a more contractionary (or less expansionary) monetary policy, and we end up with roughly the same level of output and employment.

The Fed in these situations may want Congress to provide stimulus, as Fed Chairman Ben S. Bernanke has repeatedly urged, because the central bank would prefer to be able to run a tighter policy itself. But listening to him would merely change the mix of fiscal and monetary policy that reached the same result.

There’s so much that’s strange here.

First of all, while the government engaged in stimulus, the Fed did not counter it in any way. Bernanke threw the kitchen sink of monetary policy at the problem, backing up government spending.

So right off the bat, the idea of the Federal government vs. the Fed doesn’t hold up.

He also asks readers to assumed that the Fed is “perfectly effective” in hitting its inflation target. But why should we assume that? We know, for example, that thanks to the scads of underwater households out there, the typical monetary policy transmission channels aren’t working that well. In a deleveraging environment, so much of the Fed’s printing is just held as excess reserves by the bank, not lending out.

But that aside, Ponnuru is guilty of committing the same sin that he blasted at the top of his column: asking people to assume a given model.

He talks about fiscal policy and monetary policy being perfect substitutes, as if that were established fact (perhaps it is in economic policy textbooks, but that’s far from proven in the real world).

So the bottom line is: This is another failed attempt to debunk the stimulus.

One study it cites commits a logical fallacy. The other actually undermines the whole column. And then to wrap up, it asks readers to believe in a perfect-world of monetary and fiscal substitutability, which is not based in reality, and which counters the idea of dismissing arguing-by-model that it slams in the beginning.

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