Christina Romer Is Wrong About The Value Of Obama’s Stimulus

Barack Obama

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Former Obama White House economic adviser Christina Romer gives it her best effort in defending the efficacy of the 2009 American Recovery and Reinvestment Act.In a New York Times op-ed yesterday, Romer says the stimulus package wasn’t “the knockout punch the administration had hoped for, but a valuable effort that improved the lives of many.”

Romer’s pluses: a) the stimulus created three million jobs; b) infrastructure spending may pay long-term dividends; c) same goes for basic research and clean energy spending; d) by creating more growth and jobs, the stimulus may have prevented a larger rise in long-term or structural unemployment.

Romer’s minuses: a) the stimulus was too small given the greater-than-anticipated loss of 9 million jobs; b) it was not optimally designed, with too much money devoted to poorly structured tax cuts and too little going to state and local governments; c) financing a public jobs program would have helped; d) it was sold poorly and thus didn’t create as much public confidence and optimism as it could have. Here’s Romer on that last bit:

Finally, there’s little question that policy makers — myself included — should have worked harder to earn the public’s support for the act. One frustrating anomaly is that many of its individual components routinely received favourable reactions in polls, while the overall act was viewed negatively.

That is more than a simple public relations problem. Recovery measures work better when they raise confidence — as Franklin D. Roosevelt understood. His fireside chats, and his inaugural address proclaiming he would fight the Great Depression with the same resolve he would muster against a foreign foe, were aimed at reassuring Americans. Recent research suggests that New Deal programs may actually have had their primary impact on the economy by influencing consumer and business expectations of future growth and inflation.

Partly because of fierce political opposition, and partly because of ineffective communication and imperfect design, the Recovery Act generated little such rebound in confidence. As a result, it didn’t have that extra, Rooseveltian kick.

A few comments and observations:

1. How confident is Romer about that jobs created number? Indeed, she also mentions a second study that finds the spending bit — some $500 billion — may have created just one million jobs. (And recall that Romer thinks the $300 billion in temporary tax cuts wasn’t every effective.) Given the jobs gap, just how big a stimulus does she think we might have needed? $2 trillion? $3 trillion? More? Romer also forgets to mention that when you add in further mini-stimulus packages, total stimulus may have been close to $2 trillion. And we have still only regained about half of the lost jobs. Nor does she mention this anti-stimulus study by John Taylor.

2. And how confident is Romer that these jobs created studies are able to effectively tease out the impact of the stimulus versus everything else that was going on? As Russ Roberts said in an EconTalk podcast recently:

… if you list the things that happened since 2009 when the stimulus was passed, and you would list just to start with–it’s easy to make a fairly long list–you have an enormous change in monetary policy, you have enormous changes in housing prices, you have huge policy interventions in health care and in financial sector regulation, you have animal spirits, consumer confidence bouncing all around, doing all kinds of unexpected and unknown things, you have international changes; and you don’t pretend that you can quantify–oh you also have a recovery that starts at one point in the output market at least. And so you are trying to measure the impact of one of those changes–the stimulus spending–on, say employment. And you can’t quantify five of the things I just mentioned. A couple of them you can. But you are going to pretend that you’ve therefore isolated the impact of the one you really want to care about? To me, it’s so intellectually dishonest.

3. Oh, and speaking of confidence, it is interesting to see Romner invoke the “confidence fairies” that liberal economics pundit Paul Krugman regularly dismisses. Yet when Mitt Romney says how his election will improvement confidence and help create jobs, he is mocked by the left. So a Rooseveltian kick but not a Romneyian kick?

4. Back in August 2009, the White House — after having a half year to view the economy and its $800 billion stimulus response — made an astoundingly optimistic forecast. Starting in 2011, with Obamanomics fully in gear and the recession over, growth would take off. GDP would rise 4.3%in 2011, followed by 4.3% growth in 2012 and 2013, too!  And 2014? Another year of 4.0% growth. None of that happened. In fact, growth has been less than half as strong. This suggests to me that the stimulus didn’t perform anywhere close to White House expectations. It also make me doubt those rosy job creation numbers.

5. It’s funny given Romer’s support of a Federal Reserve NGDP targeting effort that she doesn’t explore that in a counter-factual.