Free Markets, Free People

Had Christy Romer gotten her way, the stimulus could have been much worse

When Larry Summers and team were preparing a memo for Barack Obama on the planned stimulus, Christina Romer was a part of the effort.  The New Republic brings to light a conflict within that team about how much stimulus they should recommend.  As you recall, the final recommendation included two options.  Option one was a “modest” stimulus in the rage of $550 to $670 of legislated money (about the same amount that Paul Krugman first recommended).  The second option was for $850 billion and was the option Obama chose.

Summers mentions in the memo that in order to make a bigger impact on the “output gap”, a stimulus of over a trillion dollars was needed but most likely “not accomplish the goal” of reducing the “output gap” because of the “impact it would have on markets”.

Romer, on the other hand, felt that closing the “output gap” was much more important than the impact such a move might have on markets and recommended a much higher stimulus.  How much higher?  Approximately twice the level of the highest option presented to Obama of $850 billion.  That’s right, about $1.7 trillion dollars.  Romer claimed that doing so would bring the unemployment rate to “5.1%”.  But then, as we remember, the country was promised that if the stimulus that was eventually passed was made law, unemployment would remain under 8%.  

Of course it didn’t rising to 10.5%.  However the prediction came directly from the memo Summers presented to the president – $880 billion stimulus would create 3.4 million jobs and keep the unemployment rate at 7.3%..  Neither of those came true and the administration was reduced to claiming “saved” jobs in its defense.

Romer’s predictions were even rosier.  She believed that a $900 billion stimulus would create 3.75 million jobs and put the unemployment rate at 6.6%.  Again, not even close.

Yet, when you read the comments of others out there, you find some of them still implying that a larger stimulus would have been better for what ailed us.  That our problem was the size of the stimulus, not its design.

Of course that’s patent nonsense.  The stimulus failed because it was horribly designed and terribly executed.  And it was aimed at the wrong things.   It became a combination of slush fund for politicians and budget short-fall device for states.  Where what little was aimed at it supposed purpose (creating jobs) it failed.  We discovered that “shovel ready” was anything but.  Additionally it was used to bail out industries government had no business bailing out.

Whether it was $900 billion or $1.7 trillion, those facts wouldn’t have changed one bit.  About all that might have happened had Romer gotten her way is a few states might have been able to delay their financial reckoning for another year or so.

Noam Scheiber, the author of the TNR article (and an upcoming book on how the Obama White House “fumbled” the recovery) doesn’t go as far as to claim the larger stimulus would have been a better choice although he certainly implies it.  He argues that Obama wouldn’t have proposed it because Congress – even a totally Democratic Congress – wouldn’t have passed a $1.8 trillion dollar stimulus.

However, he argues, the inclusion of the higher stimulus number would have gotten Obama to “have felt a greater sense of urgency had he better understood how far he was from the ideal.”

First, I don’t agree that a Nancy Peolosi/Harry Reid controlled Congress wouldn’t have done exactly that, i.e. passed an almost $2 trillion dollar stimulus package.  One only has to remember how they steamrolled the health care bill through to doubt such a thing couldn’t have happened with a larger stimulus.  Secondly, it is highly debatable that Romer’s number was any sort of an “ideal”.

It was, at most, a “best guess” and given her predictions of the effect of a $900 billion stimulus (the size eventually passed) on job creation and unemployment, it is a suspect “best guess”.

And finally, regardless of the numbers proposed, it was a terribly designed and executed program that redefined “waste, fraud and abuse”.  Doubling that wouldn’t have made it better.

Unlike some out there lamenting Summers refusal to have included Romer’s recommendation, I applaud it.  That doesn’t mean I agree with the number he came up with, but to use Washington DC budgetspeak, he “saved” us about a trillion dollars.


Twitter: @McQandO

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50 Responses to Had Christy Romer gotten her way, the stimulus could have been much worse

  • The meme from the left, that Romer & Bernstein prepared a bigger stimulus, but guys like Rahm Emmanuel and Larry Summers took it out and never gave the president the option, is just plain nonsense. You hear Cenk Uygur grousing about that same thing here => On the contrary. In her own words, Christina Romer “put it (the larger stimulus option) back in,” and made sure the president knew of the options available, notwithstanding what Congress would or wouldn’t support. Romer video clip =>

    • @JackSunday67 I hope Captain Sarcastic watches the Romer video.

      • and notice how Axelrod is “prepping” the advisers on what the pollsters are saying?

      • @Harun @JackSunday67 I did watch it. It reflects an understanding that this was a very bad downturn, but it also reflects political reality. What I don’t think was properly considered was not so much the depth but the breadth of the downturn. My point being, we should have had a stimulus plan that lasted over a period of years, not mostly in a single year.

  • So, Krugman is on suicide watch…???

  • OK, now did her super large stimulus include more tax cuts?

    Or maybe even cutting checks to every citizen?

    Because her own research says tax cuts would have a better bang than spending would.

    If she argued for a huge stimulus that was mostly tax cuts, I would have a better opinion of her.

    • @Harun There are tax cuts and there are tax cuts. I’ve been hearing for two years that the tax cuts in the “stimulus” we’re two big, but if you look at the spread of the “stimulus” funds you find out that the tax cuts were more like tax credits for desired activities.

      • @Neo_ Good clarification. One of the arguments over tax cuts is that people just use them to pay down debt and that doesn’t help in the short term. Now notice Captain Sarcastic talking about how long and deep the recession was. I think in that case, a huge tax cut, even if it was just poured into paying off debt would have been better than the stimulus we did, because in the medium term, it would have helped bank balance sheets AND helped the people who borrowed too much, AND given the people who didn’t borrow too much some cash to spend on iPads, Hookers, or Church bells.

        I’d also be okay with or even prefer no stimulus whatsover.

  • From what I have read, the real error in the stimulus plan was an inability to forecast the depth and breadth of this particular downturn. Most recessions, historically, have seen a fairly rapid response to stimulus spending and near term recovery, but had the folks trying to stimulate recovery known how deep and wide this trench was going to be, they would have opted for a larger stimulus but spread it out over a longer period. Of course everyone who thinks economic stimulus plans just flat out don’t work (contrary to most economists) can just skip over this and go back to arguing whether Obama is evil, stupid, or both.

    • @CaptinSarcastic “Of course everyone who thinks … can just skip over this.”

      We do.

      • @Ragspierre “We do.” and by we you mean you, and yet, you commented anyway.
        I wish you had skipped it, I explicitly invited you to skip it, but you just couldn’t help yourself, again.

    • You are truley ignorant of economics. Yes, they DO NOT WORK, ever. But feel free to try and prove me wrong. Go ahead, find that one time in history when massive government spending ever produced anything but massive debt. (here is a hint, don’t say WW2 because we didn’t have a growing economy untill after the war and the government contraction. @CaptinSarcastic

      • @kyle8 If I am truly ignorant of economics, then I am not alone, in fact the vast majority of economist must be truly ignorant of economics as well, unless of course they agree with you. My opinion is that your opinion is based on the echo chamber of likeminded assertions and arguments that you already agree with. Macroeconomics are not unlike climate debates, there are so many variables that anyone with the slightest comprehension of economics can find data to meet the needs of their argument. I won’t bother to post economist surveys, they are easy enough to find, and in your search, you will find that a large majority of economists not only agree that stimulus in general works, but that this particular stimulus plan worked. I know this is an appeal to authority, but then again, your assertion was founded on the unproveable fallacy. Since it is impossible to know with certitude what would have happened if an alternate path had been taken, the effects of any particular macroeconomic policy is unproveable, and you rely on this fallcy to argue that since the effectiveness of stimulus is unproveable, it must therefore be false. The same false argument could made against every single theory you believe to be true. Here, read this for a different point of view (and then you can say these economists are completely ignorant of economics. 😉

        • @CaptinSarcastic @kyle8 The economists cited in the link don’t believe that a “vast majority” agree with their opinion “The professional opinion of economists regarding this question is sharply divided…” with many economists on each side.
          What the linked article doesn’t show (partially because of the absence of study the conclusions are based on) is a single instance where massive government spending had a overall positive effect for the economy that paid for the spending. It only states that outside money has a multiplier effect for the area that gets the windfall.

          The author’s study, and the corroborating studies they cited, all involved money coming from outside the local area where the ‘multiplier’ was noticed, without regard for what the negative effect was for the area that made the payments. The US Government isn’t getting free money from outside to spend for a stimulus. It is either collecting it from it’s citizens, or taking a loan in the form of treasuries. To get the money from citizens, with a multiplier of 1.5, requires the government to get 66% of that additional GDP from taxes, meaning tax increases (unless the effective rate was already at 66%). Treasuries are effectively a loan the government has to pay off with interest. At current rates, a 30-year bond for $1,000 costs the US government a total of $1,564; more than the total claimed GDP boost of the stimulus.

          If government spending really helped more than it cost, why haven’t any cities or states figured it out yet by sending money to each other? Detroit could spend $10 million
          on Cleveland, and vice-versa, resulting in both cities having improved economies. In a year or so they could repeat the process with larger sums of money, and just continue until both cities are prosperous.

        • @CT Phil @kyle8 I think you missed the point of article, expecially since the point of the article was that stimulus works and what you took away was the notion you already had, which is that stimulus doesn’t work. “In particular, our results support the view that aggregate fiscal stimulus should have large output multipliers when the economy is at the zero lower bound.”
          But more importantly, if you want to talk about cities, there has to be a sound economic infrastructure experiencing a market driven or cyclical downturn for a stimulus plan to work. You can’t spend enough of others people’s money to reverse a devastating economic collapse as has happened in Detroit. Only time and ingenuity can reverse the setbacks of that city. Basically, you took a couple of sentence, out of context, bent them to your existing theory, and claimed the article showed the opposite of what the economist who wrote it believe their results show.

        • @CaptinSarcastic The bulk of the article was that the authors’ study showed that stimulus does have an output multiplier for the region that gets the money. That was then expanded out of context, with no basis from the study, to claim that the stimulus had an overall positive effect at the national level. I showed why looking only at the GDP of the region that gets the stimulus doesn’t correlate to a net gain for the area paying for it.
          The cities weren’t central to the point. If Detroit is too far gone, then pick ANY two cities or states that do have a sound economic foundation and use them for the example. By your theory, they should be able to spend each other out of their slump, but none of them actually have.

          Basically, I read for comprehension; you just found a conclusion you supported and breezed over the rest.

        • @CaptinSarcastic @kyle8
          ” a large majority of economists not only agree that stimulus in general works, but that this particular stimulus plan worked.”

          Just like AGP.

        • @CaptinSarcastic @kyle8

          ” I know this is an appeal to authority”
          ” Since it is impossible to know with certitude what would have happened if an alternate path had been taken, the effects of any particular macroeconomic policy is unproveable”
          “And this proves I am right and you are wrong”.
          Excellent logic.

          To paraphrase Monty Python, “There, I’ve run circles around meself logically!”

        • @timactual @kyle8 Tim, what I am saying is that I think stimulus works, my position is well supported. Neither my opinion, nor opposing opinions, on macroeconomic policy can be empirically proven because there are too many variables. I NEVER said this PROVES I am right, I just invited people to read research that suggests a point of view they disagree with. Unlike some folks around here, I do not have absolute faith in my opinions. One of the main reasons I hold the position I hold is my experience in the early 80’s as a huge advocate of supply side economics. I believed that taxes could be reduced and revenues could increase enough to keep up with spending. I was open minded enough to watch my point of view crushed by reality as taxes went down and spending went up and our national debt skyrocketed. I saw this experiment repeated in the last ten years. Yes, if you reduce taxes in a growing economy, revenues will increase year over year, but the result has been that revenues do not increase enough to keep pace spending, and there is evidence that the tax cuts causal factors of economic growth, especially considering economic growth is the norm. David Stockman, one of the architects of Reagan economic strategy has admitted as much and has apologized for foisting this flawed economic theory upon us. The original name for this strategy was the horse and sparrow theory, the idea that you if you feed the horse, the feed will pass through and provide food for the sparrows. That, IMHO opinion is the more accurate description.

        • @timactual @kyle8 That is not lost upon me, as I stated above, “Macroeconomics are not unlike climate debates, there are so many variables that anyone with the slightest comprehension of economics can find data to meet the needs of their argument.”

        • @CT Phil Phil, THE conclusion of the researchers is THE conclusion I pointed to.

        • @CaptinSarcastic THE conclusion of the article is different from, and is not supported by, THE study done by the researchers.

        • @CT Phil No, they don’t, there are 14 different studies referenced, what did you do, pick one and call it a day?

        • @CaptinSarcastic For my last comment, I picked the one study the that the authors picked to base the article on – the one that the authors conducted. Other articles were mentioned as references.

          The article also clearly states that the studies that corroborate their data also deal with the effect of extra money coming into a region –
          “A number of other authors have recently exploited other sources of sub-national variation in spending to estimate similar relative multipliers.”

          The studies deal with effect on GDP of the region that gets the money. That is only part of the equation when detrmining if the stimulus had a positive effect on the national economy, as the money had to come from somewhere.

    • @CaptinSarcastic Everybody knew that the construction sector had the biggest impact from the housing bubble, but less than 5% of the stimulus went there.

      • @Neo_ I count at least $160B of the stimulus that went to construction projects of one sort or another. Discounting the tax break of the stimulus, that seems to be about 35% of the stimulus. Even counting tax cuts, it’s still about 20%. How do you come up with 5%?

    • @CaptinSarcastic “an inability to forecast the depth and breadth of this particular downturn”

      Sure, nobody knew a banking recession would be longer and more brutal than a regular inventory business cycle one.

      Seriously, you’re buying this BS? They had to intervene to save GM for god’s sake. They had to bail out every bank. The entire housing market collapsed…this was all before Obama was sworn in.

      But nobody knew.

      • @Harun @CaptinSarcastic Okay, I agree, there were enough folks out there who saw how bad this was going to be (is). I would recharacterize it to say that politically, there was an inability to build the stimulus to handle the breadth of this particular downturn.

        • @CaptinSarcastic @Harun Ah…the old, old Collectivist story. “We were not committed enough…”.

          That one NEVER gets old…!!!!

        • @Ragspierre @Harun No, more like we just did what we always do and did not consider the extent to which this downturn could be different. But hey, why should I expect you could restate my point correctly when you have so much trouble stating your own points.

        • @CaptinSarcastic @Ragspierre @Harun
          ” . . we just did what we always do and did not consider the extent to which the downturn would be different.” In that I agree with you. Obama and company took a look at all the other recessions we had lived through since WWII and noted, without a stimulus in any one of them, the economy came roaring back after 18-20 months. All that was needed to solidify the Regime for the next generation was pass a bill that look like a savior, and with a complete dominance of both House & Senate all that needed to be determined the the size fo the Stimulus. Obama, just prior to passage stated during an interview that $500 Billion should be more than enough. Krugman himself said $600 Billion would be overkill. Then the story would proceed to the point when the economy recovered leading into the 2010 midterm elections, they could stand on their soap box and claim to the heavens how they had saved the republic – remember the “Summer of Recovery” claimed by Obama in May 2010? But history hows us the Summer of Recovery was a bust and the Dems took the shellacking they deserved in the midterms.
          No, Cap, I have a dual Batchelors in History & Economics and I will tell you that had the Stimulus put the money into the infrastructure instead of paying off IOUs owed to democratic cronies such as ACORN, there could have been the possibility of success.
          Additionally, as an Environmental Professional, I can also tell you there is no such thing as a “Shovel Ready” Project. Most of those infrastructure projects that did in fact end up in the bill are just about now finishing their Environmental Impact Statements about now mush less turning any earth.
          So, I do not claim to be one of those economic gurus but I do know enough to see through this fisaco!

  • It is amazing and appalling that these retards are in charge of our government. There is no possibility of Keynesianism working, and all of the evidence that we have indicates a multiplier effect of less than one.

    It is the real voodoo economics. And to think that these people still believe in it is worrisome to say the least.

  • I’m not convinced that a stimulus of ANY size creates value, regardless of how it is executed. Money filtered through government agencies has less purchasing power than it did when it resided in the pockets of the people who earned it. Thus, wealth is invariably destroyed, along with the jobs that wealth would have created.

    $100 in the pocket of a private actor can procure $100 worth of goods and services. But $100 given to the government can probably only purchase $75 worth of goods and services once the bureaucratic costs are covered.

    If the FedGov could manage operations in a way that added value compared to their private counterparts, then you would see private enterprises outsourcing various tasks to the federal government as a way of boosting the bottom line. Instead, we see the opposite: when an agency wants to become more efficient, it will outsource portions of its operations to the private sector.

    Could there be a clearer admission on the part of the FedGov that money transferred its way loses value? So why would we expect that the alleged stimulus plan would have a positive net effect?

    —Tom Nally, New Orleans

  • The “Stimulus” was a political payoff rushed through as emergency legislation. The emergency was to get payoffs done, not to help the economy, but to relieve the payees from the stress of the downturn and keep them politically primed. Obama did the community organizer routine, letting the Pelosi-Reidists handle the dirty work. No question — *No* *Question* — in my mind that Barack would have been sorely disappointed if the “Stimulus” had actually stimulated anything. That would have been contrary to what he wanted and what he needed.

    To this not-going-to-stimulate-anything he followed on by adding uncertainty upon uncertainty to the economy, wet blanket after wet blanket, via legislation, regulatory regimes, and executive attitude.

    That’s the baseline for what this is. If you’re not getting that, you’re working within the normative terms of American politics, and Obama cannot be understood within those terms and that includes the “Stimulus,” his signature first act, his emergency ram-rod, and everything that came after it.

    The program, superficially, has been ruin and dependency. Ruin to move more people into dependency, to swallow dispirited decline, to swallow Obamacare. That’s the superficial background signal. The realer signal is “America delenda est.” One forgets how much the Left actually, *literally* hates America at one’s peril.

    • I’ll add that the problem with any sort of “stimulus,” especially of this size, is that it falls afoul of the “knowledge problem.” There is no immediate purpose to any of that mone from an ecomomic point of view at the microeconomic level. Too little knowledge, or none at all, between buyers and sellers. It cannot, therefore, stimulate anything but the political loyalties of those getting the payoffs. It is distinctly un-economic.

    • I’ll add that the problem with any sort of “stimulus,” especially of this size, is that it falls afoul of the “knowledge problem.” There is no immediate purpose to any of that money from an ecomomic point of view at the microeconomic level. Too little knowledge, or none at all, between buyers and sellers. It cannot, therefore, stimulate anything but the political loyalties of those getting the payoffs. It is distinctly un-economic.

    • Also, for the election year, we’ll get lots of happy talk about how “things are turning around.” Yes, left alone for even a few minutes the economy will start to come around. So, in spite of everything done to it, the economy might actually make it to 3% growth this year. A rotten number as a sign of recovery, but good enough to let that rotten prick put his big smile on and whisper “don’t go back now to the failed policies of the past,” when there is nothing in the past since FDR’s policies that failed this badly, and was intended to fail this badly. They’ll also huff and puff and try to blow that unemployment number down below 8% and if it hits 7.9% we’ll have a “my shit doesn’t stink” moment from him that will surpass all other such moments.