It’s Time to Call It a Failure
Recently Mario Rizzo gave us permission to say “we told you so” with respect to the failure of the fiscal and monetary stimulus policies that have been the predominant policy response to the Great Recession. I think he was quite right to do so, and also quite right to note that many of us predicted that stimulus advocates would argue, in return, that it simply wasn’t big enough to do the trick.
That claim is, of course, not falsifiable. Those advocates would claim, perhaps rightly, that the arguments of stimulus critics that things would have been better without the stimulus is equally non-falsifiable. Fair enough, although we may have some markets in which we can get a sense for what might have happened. But there is one thing we can do, which is to look at the actual results of the actual policies that were adopted and compare them, at least in one case, to the promises and alternative scenarios that the promoters themselves put forward at the time. While this cannot conclusively rebut the argument that “it wasn’t enough,” we would have good reason to be skeptical of that argument if what we got did not improve things, nor come near to doing what its advocates promised.
First let’s look at the unemployment and inflation rates in January of 2009 when the concrete proposals for a major fiscal stimulus were in the air. That January the unemployment rate was 7.8%. In May 2009 it topped 9%. In the 24 months since then, it has been below 9% only twice, and then by one or two tenths of a percentage point (and that may have been due to discouraged workers leaving the labor force). In the aftermath of the stimulus, even given a few months lag for the spending passed in February to kick in, we’ve seen two solid years of unemployment of essentially 9% or higher. In the early 80s, we saw 21 months of 8.8% unemployment or higher. May 2011 makes 26 months of 8.8% or higher. Finally, the May 2011 unemployment rate was 9.1% or 1.3 percentage points higher than when the call for stimulus was being made.
Of course the Obama Administration argued that the stimulus plan would lead to unemployment peaking at about 8% in the third quarter of 2009 and that it would be around 6.75% this summer. Not only that, they argued that if we did nothing, that is, if we passed no stimulus plan whatsoever, the unemployment rate would peak at about 9.0% for most of 2010 and would be at about 8% this summer.
In other words, with the stimulus, we saw an unemployment rate that peaked a full percentage point higher than what its promoters said we’d have without it, and that has remained that much above the no-stimulus prediction since then. By its own standards, the fiscal stimulus has been a failure.
On the inflation side, matters are a bit more complicated. The inflation rate in January of 2009 was effectively zero and the rate for the whole year that followed was negative as the depths of the recession set in. But since then, the CPI has turned positive again, with the May 2011 annual rate being 3.57%, up from 1.63% just four months earlier in January. That 3.57% annual rate is higher than the average annual inflation rate (measured by the CPI) in every year from 2000 to 2007. Arguably that period was seeing inflation, but mostly in assets that were not picked up by the CPI. This time around, the CPI may well be picking it up, thanks to the fact that the transmission path is now affecting consumer goods more directly. Those who warned that the quantitative easing would eventually produce inflation on the consumer side have some justification for now saying “I told you so.”
If you want to play the misery index game (unemployment plus inflation), it was 7.8 in January of 2009 and it is now 12.7. Other than being a tad higher in December 2009 (again, after the stimulus), it has not been that high since the end of the back-to-back recessions of the early 1980s in May of 1983. If we work from May 2009, when it was 8.1, the effect of the stimulus in the succeeding two years has been to drive the misery index up by over 50%.
The effects on real Americans? As one measure, let’s look at the labor force participation rate. In January of 2009 it stood at 65.7%. In May of 2011, it was 64.2%. Again, you’d have to go back to the end of the recessions of the early 1980s to see a participation rate that low. It’s also worth noting that it was falling before January of 2009, having peaked in early 2007. The stimulus did nothing to halt the decline and possibly accelerated it as the persistent 9% unemployment rates have led to more workers choosing to drop out of the labor market altogether.
I could go on, but it’s really not necessary. The current administration came into office promising that these stimulus policies would save us from economic disaster and by their own definition of “disaster” (namely, a year’s worth of 9% unemployment), they have failed. The stimulus has produced an economy worse than the disaster they predicted without it.
Given that this administration also promised that it would, unlike what it claimed of the Bush years, rely on data and science to make policy, it should be admitting its own failure. The data in this case tell a pretty clear story of failure, and failure in comparison to the administration’s own criteria.
There are those who will continue to say that the real failure was that the stimulus was not big enough. These data will surely not persuade them, but they should. It is not clear by what economic logic it could be true that some stimulus will make matters worse but lots will make matters better. It would be one thing if the actual stimulus had improved things a little, then the case for claiming that a larger stimulus would do more would be at least plausible. But when a little makes things worse than a “disaster,” it boggles the mind to think what kind of real disaster more would bring.
It’s time for those of us who said the fiscal stimulus and quantitative easing were bad ideas to stand up and proudly say “we were right and the data are on our side.” It’s time to call it a failure. Period, end of sentence.