Did the Stimulus Work?

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The White House has released a report by the Council of Economic Advisers evaluating the effects of the 2009 stimulus program:

The two CEA methods of estimating the impact of the fiscal stimulus suggest that the ARRA has raised the level of GDP as of the second quarter of 2010, relative to what it otherwise would have been, by between 2.7 and 3.2 percent. These estimates are very similar to those of a wide range of other analysts, including the Congressional Budget Office.

The CEA estimates that as of the second quarter of 2010, the ARRA has raised employment relative to what it otherwise would have been by between 2.5 and 3.6 million. These estimates are broadly consistent with the direct recipient reporting data available for 2010:Q1.

How did Christina Romer, the head of the CEA, arrive at these estimates?

We estimate the role of the Recovery Act in effecting this dramatic turnaround in two ways. One uses estimates of the effects of fiscal policy from standard macroeconomic forecasting models. The second involves a comparison of the actual behavior of GDP and employment with a plausible, statistically-determined baseline.

The first approach involves the same technique used when Romer first proposed the stimulus, and for the CBO’s subsequent evaluation. Romer assigns output “multipliers” to government spending of various types, which are estimated through a textbook model. The CEA assumes that an extra dollar of government spending results in an output growth of 1.5.

These multipliers have come under criticism. Robert Barro has argued that these multipliers, properly calculated, ought to be far lower than the values Romer assigns. Other researchers find multipliers that are much higher after financial crises. All that is certain is that these estimates are little more than educated guesswork.

The second method involves eyeballing economic data and examining growth before and after the stimulus. But, of course, it is difficult to disentangle the effects of the stimulus from various other policies – and also a natural recovery. Greg Mankiw has made a similar point, arguing that:

Of course, there were a lot of other things going on in the economy at this time. Monetary policy, for example, has gone to extraordinary measures to get the economy going. TARP was also an unusual intervention that seems to have done its job of returning the economy to some degree of financial normalcy (even if leaving the bad taste of increased moral hazard). Giving credit for the economic improvement to the fiscal stimulus is a large leap.

Ultimately, though it has been more than a year from the passage of the stimulus, we are not much closer to precisely calculating its effects.