Wednesday, June 03, 2009

So, How's That Stimulus Working?

Not so well, according to John Lott, at least by the standard of the pre-stimulus predictions
How did the predictions stack up? While the unemployment rate was at 8.1 percent in February, it had risen to 8.9 percent by April. By May 11, Christine Romer was calling 9.5 percent unemployment by the end of the year “pretty realistic.” Business economists and forecasters surveyed by The Wall Street Journal had increased their estimates to 9.7 percent. Thus, what Romer was predicting would be the worst-case
scenario if the stimulus was not quickly enacted is occurring with the stimulus plan in place.
And,

Economists have consistently been expecting the economy to begin showing positive growth in the second half of this year. But the stimulus appears to have dampened the recovery that economists were expecting.

Take the expected growth in the third quarter (from July to September) this year. In January, the forecasters surveyed by the Wall Street Journal were expecting GDP during that period to rise by 1.2 percent at an annual rate. By May, the expected growth had been cut in half to 0.6 percent. The pattern is similar for both the second and fourth quarters this year. Paul Evans, the editor of the Journal of Money, Credit, and Banking and an economics professor at Ohio State University, agrees with this and tells FOX News: “Most likely the economic recovery would have been more rapid at this point without [the stimulus package].”

And,

Other forecasts have shown a similar pattern. By the end of last week, the U.S. manufacturing output is now expected to plummet by 12 percent this year. In February, the drop was expected to be 8 percent. The decline in the housing market failed to slow down after the stimulus package. The mortgage delinquency and foreclosure rates in the U.S. just experienced their biggest quarterly increases since records started in 1972. Both numbers are also at their highest recorded levels. The S&P/Case-Shiller U.S. National Home Price Index posted a 19.1% drop from a year earlier, the biggest single quarterly decline for the reading’s 21-year history. In January, forecasters expected about 770,000 new homes being built this year. By May, only 580,000 new homes were expected for 2009.

Over the same four months, economists have also become more pessimistic about housing starts next year: The number of expected new housing starts for next year declined from 980,000 to 820,000. Again, what recovery was originally expected later this year and next year has actually declined after the stimulus.

Now, correlation does not imply causality. In this case, the fact that things are worse than expected even before the stimulus was passed, does not prove the stimulus isn't working, but while things could have been worse than this without the stimulus, this is an extremely weak argument in its defense. After all, I could say with at least equal plausibility that eliminating the capital gains tax; cutting personal and corporate income taxes; lifting restrictions on energy exploration; oil refinery and nuclear power plant construction; and promoting a strong dollar would have an even greater positive impact on the economy.

Of course, defenders of the stimulus might also cite the fact that very little of the stimulus money has actually been spent, but that quickly becomes an argument in favor of tax cuts and deregulation. After all, in order for the government to put money into the economy, it has to take it out of the economy first- whether through taxes, the sale of bonds, or devaluing the money already in the economy by printing more of it- and then it has to, you know, spend it. On the other hand, cutting taxes allows money that is already in the economy to be spent, and deregulation and opens up new areas for investment or allows businesses to operate more efficiently by reducing the cost of doing business.

I guess you could stick to the whole "jobs saved or created" mantra, with the emphasis on saved, but as Jim Geraghty points out, it "can't be declared horsepuckey until national employment falls below 9.67 million jobs."

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