The Stimulus May Have Saved the Economy, but It Won't Matter in November

President Obama, stimulus package
President Obama, stimulus package

Across the political spectrum, pundits agree that November's midterm elections will be a bloodbath for the Democratic party. Estimates of just how many seats the Democrats stand to lose vary from 65 to 103 in the House of Representatives and six to seven in the Senate, seriously threatening the party's domination of Congress.

At the heart of the furor, an angry electorate has questioned the effectiveness of the Obama administration's stimulus program, arguing that it has failed to support the economy. Yet, according to two well-known economists, the stimulus program actually saved the country, keeping it from plunging into what they call the "Great Depression 2.0."

Officially referred to as the American Recovery and Reinvestment Act (ARRA), the stimulus program was designed to minimize the effects of the recession by promoting infrastructure projects, cutting taxes and funding emergency unemployment payments. In the process -- the government hoped -- ARRA programs would pick up the slack left by the collapse of the housing and credit bubbles. Critics argue that the plan has failed to accomplish those aims, noting that the unemployment rate is far higher than it was when Obama took office. In December 2008, the jobless rate was 7.2% and steadily rose for the next 11 months. It peaked at 10.1% in October 2009 and since then has slowly fallen to its current 9.5%.

Things Could Have Been Worse

In a July paper titled "How the Great Recession Was Brought to an End," Alan S. Blinder, an economics professor at Princeton University and former vice chairman of the Federal Reserve, and Mark Zandi, the chief economist at Moody's Analytics, argue that the stimulus plan has actually been a huge success. According to the pair, ARRA created 2.7 million jobs and added $460 billion to the gross domestic product. Taken in combination with the bank rescue package, they claim that the stimulus's effects were even more impressive: Without the stimulus, unemployment would be 11% today, but without either the stimulus or the rescue package, it would be a staggering 16.5%.

"If policymakers had not reacted as aggressively or as quickly as they did, the financial system might still be unsettled, the economy might still be shrinking, and the costs to U.S. taxpayers would have been vastly greater," they wrote.

Blinder and Zandi's claims are quite similar to those made by the [famously nonpartisan] Congressional Budget Office last March. According to the CBO's analysts, the stimulus program raised the country's GDP by between 1.7% and 4.2% and kept unemployment from rising a further 0.7% to 1.5%. This translates into an estimated 1.2 million to 2.8 million jobs that were directly or indirectly created by ARRA. In terms of jobs preserved, the gains were even more impressive: The CBO estimates that the stimulus saved between 1.8 million and 4.1 million full-time jobs.

Optimism Is a Hard Sell

Blinder and Zandi's conclusions are controversial, in part because they highlight the multiplier effect -- or extended impact -- of some types of spending. For example, the pair notes that ARRA funded $50 billion in "income transfers," including Social Security, COBRA and unemployment allowances that worked their way into the economy through the hands of unemployed or disadvantaged workers. In the process, these funds had a positive effect on GDP because they further stimulated the economy by encouraging retailers and service providers to retain workers. Some economists, including former Bush Treasury Undersecretary John Taylor, argue against the multiplier effect, claiming that direct government spending has a negligible benefit for GDP.

While the Obama White House has long touted the effectiveness of ARRA, its partisan position has made the administration's conclusions easy to ignore. Similarly, when the chief economist at Goldman Sachs praised the stimulus plan, some critics were quick to claim collusion between the White House and one of the most prominent Wall Street banks. Zandi and Blinder, on the other hand, seem to have a somewhat balanced political agenda: Blinder advised John Kerry and Al Gore on their presidential runs; Zandi advised John McCain.

Regardless, the conclusions made by Blinder and Zandi will have minimal effect this fall. While most experts agree that ARRA saved millions of jobs, the idea that things could be a lot worse is a hard sell in an election year. With a brutal unemployment rate that is very slowly improving and a still-sluggish economy, voters are eager for change. According to a recent poll conducted by the American Research Group, 53% of voters disapprove of Obama's stewardship of the economy. While the president has another two years to convince voters that he belongs in the White House, many congressional Democrats may find that November is the end of the road.