"Absolutely" Working?

Earlier this month, Christina Romer, the Chair of the President’ Council of Economic Advisors, gave a speech at the Economic Club of Washington during which she assured us that, “absolutely” the stimulus is working.

As evidence for this “clear eyed assessment” of the $800 billion spending package, Romer cited a slower rise in unemployment and better than predicted GDP numbers.

Throughout her speech, Romer referred to the economy as a plummeting sky diver and the stimulus bill as his parachute. Since her speech, however, a number of economists have argued that the ‘chute is far from fully open.

Yesterday, an article from Forbes’ Thomas Cooley attempted to sum it all up. Here are the highlights:

Now understand that, no matter what point of view you start from--whether you believe stimulus is effective or that it is the voodoo economics of the new millennium--the Economic Recovery Act is a grand fiscal experiment. It is a bit like throwing the baby in the swimming pool to see if it swims.

At some future time, after careful parsing of the data and studying people's decisions, we may have a much better estimate of the effectiveness of debt-financed government spending of this sort. One should keep in mind, however, that the effectiveness (or ineffectiveness) of the programs to combat the Great Depression in the 1930s is still a matter of great debate. Of course it would be a lot easier if the stimulus programs were better designed and more focused.

To claim, however, that the evidence suggests it is working--and that we need more of it--is nonsense for two reasons. The first, which ought to be obvious, is that we only get one observation on events. To draw a causal connection between the stimulus and the fact that we haven't plunged into another Great Depression seems bold, to say the least. Since we don't have a parallel universe in which to play out events without the stimulus, we can't refute it.

The other reason why it is illogical to claim a boost from the stimulus is that, for the most part, it hasn't gone out the door yet. In a recent presentation made at the International Monetary Fund, Doug Elmendorf, director of the Congressional Budget Office, presented the rates of spending for different pieces of the stimulus package. He estimates that by the end of fiscal year 2009, which falls on Sept. 30, just a month from now, 32% of the income transfers for things such as food stamps and extended unemployment benefits will have been spent and 31% of the tax cuts will have been disbursed. And by the end of fiscal year 2010 just 73% of the money allocated to these programs will have been spent. …

But the most important stuff--the discretionary spending on infrastructure--has hardly started. By the end of the fiscal year, only 11% of the budgeted discretionary spending on highways, mass transit, energy efficiency and medical infrastructure will have gone out the door. This is the really direct government spending that many associate with the stimulus. By the end of fiscal 2010, Elmendorf estimates that only 47% of the infrastructure spending will have occurred.

Check out the full article which contains a couple of informative graphs comparing this downturn, and supposed recovery, to others over the last 30 years.