Robert Samuelson March 16, 2013

Five years after becoming law, the American Recovery and Reinvestment Act of 2009 — better known as the “economic stimulus” — remains controversialand divisive. Its birthday has triggered retrospectives that suggest atentative verdict on its usefulness.

The main contribution comes from the White House’s Council of Economic Advisers. In its annual report, it reminds us that the original stimulus, costing about $800 billion,was only half the show. As its impact waned, the administration andCongress enacted other like-minded measures — the biggest were thetwo-percentage-point cut in Social Security’s payroll tax and theextension of unemployment benefits — with a price tag of roughly $700billion. The term “stimulus” was dropped because it proved politicallytoxic even if many underlying programs were popular.

Together, the spending increases and tax cuts helped stop the free fall andpropel recovery, says the council. At their peak in 2010, they createdabout 2.5 million jobs, the council estimates. Although their boost toemployment has now faded, the stimulus provided support when support was needed. Human misery was also alleviated. Unemployment benefits went to 24 million workers and aided 70 million people, including theirfamilies. All in all, mission accomplished.

Not really, retorts Stanford economist John Taylor, a stimulus critic, on his blog. “It’s a tough case to make” that the stimulus jump-started the economy. Some numbers also support this skepticism.

Government stimulates the economy by spending more than it taxes. So deficits measure total stimulus. These were huge — $5.8 trillion from 2009 to 2013 — and vastly exceeded the stimulus packages alone. They reflected twoother factors. First, “automatic stabilizers”: In a recession, thebudget shifts toward deficit because income taxes fall and spending(unemployment insurance, food stamps and the like) rises. Second, thebudget had a structural deficit — a gap between spending and taxes —before the Great Recession. Yet, despite unprecedented post-World War II deficits, the recovery has been weak. In its first three years, it averaged about half the growth of earlier postwar expansions. There’s the puzzle: monster stimulus, midget recovery.

How to explain the contrasting stories?

Superficially, economic stimulus seems common sense. If private-sector demand isinadequate, the public sector ought to fill the void. In practice, it’snot so simple. Economists talk of “multipliers”: how much an extradollar of spending or tax cuts spurs the economy. Unfortunately, it’sunclear. The Congressional Budget Office surveyed scholarly studies andfound that multiplier estimates for government investment spendingranged from 0.5 to 2.5. This means that a dollar of spending generatesbetween 50 cents and $2.50 in added output (gross domestic product).Quite a range!

Valerie Ramey, an economist at the University of California at San Diego whohas estimated multipliers, says that differences among studies oftenreflect their assumptions of how fast the economy would have grownwithout stimulus — but, as she adds, we don’t know that. The assumptions are educated guesses. Her studies consistently findmultipliers of less than one for government purchases. Again: For anextra dollar of spending, GDP rises less than a dollar (about 80 centsby her figures).

Part of the stimulus is lost because it dampens private spending. Onechannel is interest rates. If higher government borrowing raises rates,it will crowd out credit-sensitive purchases (cars, housing, businessequipment). This explains why deficits, when the economy is near fullemployment, don’t likely boost growth. But it’s not a problem now. Theeconomy isn’t near full employment, and interest rates have been lowsince 2008.

Still, the stimulus might dissipate in other ways. The economist Milton Friedman hypothesized that people tend to save one-time income gains; they calibrate spending and living standards to their permanent income. If so, temporary tax cuts may be mostly saved. Businesses may behavesimilarly. They may refrain from expanding factories or hiring inresponse to temporary spurts in government spending. Then there areimports; when Americans buy, the stimulus erodes.

All this makes for a messy verdict. When proposed, President Obama’sstimulus was desirable. (Disclosure: Though disliking details, I favored it.) Regardless of multipliers, it supported the economy. It also sent a message along with the auto-industry bailout, the Federal Reserve’seasy money and the Troubled Asset Relief Program: The government won’tlet the economy collapse. This was crucial to restoring confidence. Thestimulus was a justifiable emergency measure.

But the emergency has passed. The economy, though struggling, is notfailing. The administration attributes its sluggishness to many causes(household debt, Europe’s problems, Washington’s political discord).Maybe. But more stimulus won’t cure underperformance and may perverselycontribute to it. By highlighting the economy’s weakness, it may magnify consumer and business caution. Pessimism becomes self-fulfilling. Aneconomy dependent on periodic shots of stimulus is an economy ineclipse.

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