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Tom Firey: Would any amount of stimulus spending have been enough?

September 26, 2012|By TOM FIREY

For five years now, American policymakers have tried to fix the nation’s economy. Republican and Democratic presidents and Republican and Democratic congresses have passed more than a dozen stimulus measures and jobs bills, and the Federal Reserve has launched several programs intended to get the economy rolling.

Yet the outlook remains grim. The latest Labor Department jobs report classifies 8.1 percent of American workers — 12.5 million people — as unemployed, 5 million of whom have been out of work “long-term.”

Another 8 million are working part time though they want full-time jobs. And millions more have dropped out of the labor pool altogether because of bleak prospects. 

Given those numbers, it seems obvious that the government stimulus efforts have failed. Yet fans of stimulus claim that it has “worked,” or else that the only problem is that it simply wasn’t big enough. Are these people credible?

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Many stimulus supporters say the efforts succeeded because they “created jobs.” For instance, writer Michael Grunwald defends the 2009 American Recovery and Reinvestment Act (ARRA), claiming that “at its peak, [ARRA] directly employed more than 700,000 Americans on construction projects, research grants and other contracts,” and that it “created or saved” another 1.4 million jobs indirectly. 

However, even assuming his numbers are correct, ARRA was supposed to do far more than just create a relatively few temporary jobs in a U.S. workforce of more than 150 million people (at a cost of $320,000 per job). ARRA and the other measures were supposed to stimulate (hence the name) broader economic activity as government dollars were re-spent by the people who received them, and then re-spent again and again. At least, that’s what Obama administration economists promised when they unveiled ARRA, adding that it would lower U.S. unemployment to 5.5 percent by September 2012. 

Other stimulus supporters say the measures, in fact, have worked because gross domestic product (meaning the value of goods produced by the American economy) is now growing. However, the stimulus was supposed to accomplish far more than just move GDP upward. It was supposed to return the U.S. economy to a level close to its long-term potential.

For three years now, U.S. GDP has been stuck far below potential GDP, creating a seemingly permanent “potential gap” that has not closed even a little bit since the very bottom of the recession. That gap is seen in the tens of millions of unemployed and underemployed workers, the countless idled factories and the money that sits in bank vaults instead of being invested in new ideas and opportunities.

This is different from previous American recessions, where GDP growth steadily closed the gap once it started growing again. Our economy is like a sick child whose fever isn’t going higher, but it also isn’t going down.

Some stimulus supporters concede that government measures haven’t fixed the economy. But, they say, that’s only because more stimulus is needed, and ARRA’s $800 billion size was too small compared to the severity of the recession. 

But, as already noted, ARRA wasn’t the only, or even the largest, stimulus measure that the government implemented. Since 2008, the federal government has passed at least 15 stimulus bills totaling nearly $2.5 trillion. Other stimulus provisions were slipped into unrelated legislation, bringing the total to $4 trillion.  And the Federal Reserve has pumped in trillions of dollars more. That’s an awful lot of stimulus.

And that leaves us with a tough question for stimulus supporters: If all that money isn’t enough, then is stimulus practically impossible?


Thomas A. Firey is a senior fellow for the Maryland Public Policy Institute and a Washington County native

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