Back in January 2009, Christina Romer and Jared Bernstein produced a report estimating future unemployment rates with and without a stimulus plan. Their estimates, which were widely circulated, projected that unemployment would approach 9% without a stimulus, but would never exceed 8% with the plan. The estimates, along with real unemployment rates, are posted below:
In May 2011, using the latest figures available from the BLS, the unemployment rate reached 9.1%. In contrast, the Romer and Bernstein projections estimated that the unemployment rate would be around 8.1% for this month without a recovery plan, or 6.8% with a stimulus plan (which was ultimately passed). The actual unemployment rate has been consistently above Romer and Bernstein’s worse case scenario for the economy – and by a considerable margin. They projected that the unemployment rate would never climb above 9%. As time has passed, it turns out that only two months out of the last two years have seen an unemployment rate lower than 9%.
And the unemployment trajectory appears to be getting worse, not better. The last two months have seen unemployment grow; again, against projections that unemployment would decline every single month after August 2009 with a stimulus in place.
The stark unreality of the Administration’s estimates is actually not that surprising in retrospect given the nature of the estimates. Romer and Bernstein simply assumed that a dollar of spending would increase GDP by $1.55. If this assumption proved to be wrong, then all of the knock-on effects of the stimulus would simply not follow.
Romer and Bernstein defend their estimates with the argument that the economic situation turned out worse than they had anticipated; and so the economy would have done even worse without a stimulus. That may or may not be the case – but at this point, a more thorough explanation is certainly warranted.
The recession “officially” ended two years ago, yet the first quarter of 2011 only saw 1.8% growth. The Administration and Congress should have a more robust discussion about their self-proclaimed “2010 Recovery Summer” – if for no other reason than to better inform the public about the recovery challenges the U.S. still faces in 2011.
For example, there is new research that suggests that the stimulus may actually have resulted in a net loss of jobs. Regardless of the exact number of jobs lost or created, however, the fact that some economists are even arguing that it had a negative impact tells you that the stimulus may very well have been a wash overall.
Larry Lindsey offered his own review of the stimulus this week, arguing that it failed what’s colloquially known as the Sharp Pencil Test. As he explains, “if you sit down and do a back of the envelope calculation of the [stimulus] program’s costs and benefits, there is no way to conjure up numbers that allow it to make sense.” Here is more on how Lindsey applies this test to the stimulus:
[E]ven if you buy the White House’s argument that the $800 billion package created 3 million jobs, that works out to $266,000 per job. Taxing or borrowing $266,000 from the private sector to create a single job is simply not a cost effective way of putting America back to work. The long-term debt burden of that $266,000 swamps any benefit that the single job created might provide.
At minimum, the public now deserves a response from policymakers about what they have learned from 2009 and 2010 – about what actually does and does not help get the economy growing and producing more jobs.