Posted by: Jeff | August 25, 2010

CBO: Yep, the Stimulus Worked

So the Congressional Budget Office has released a report saying the stimulus package increased employment from 1.4 to 3.3 million jobs during this year’s second quarter. This brings us back to a well-trod theme, but I’ll go there anyway: The broadly-shared meme amongst Republicans that Obama’s stimulus policy didn’t work simply isn’t backed up by what we know about how economics work, or by the actual data we’ve been able to gather.

Certainly, one could argue that the stimulus wasn’t big enough, that it was inefficiently designed, that no realistically possible stimulus could have been big enough, that the stimulus’ long-term costs to the debt outweighs its immediate benefits to the economy, or that the administration wildly inflated expectations. Any of those criticisms seem plausible, and I think the last one is undeniable. But it doesn’t follow from any of those criticisms that the stimulus didn’t work. It follows that the stimulus could’ve worked better if it was differently constructed, or that the degree to which it worked wasn’t enough to outweigh competing forces. None of which is what the Republicans are arguing, which is that the entire idea of the stimulus was unsound.

This gets to the question of what to make of the midterms, and the thumping the Democrats seem to be headed for at the polls. Not even liberals are denying that this is the likely outcome, but they’re arguing it will be the result of broad structural forces — majority parties usually lose seats in midterms, and a bad economy tends to render American voters especially hostile to incumbents — and will have little-to-nothing to do with the quality of the Democrats’ policies. In other words, the only lesson Obama and the party leadership should take from their impending defeat is that they were the victims of bad luck. And they should stick with the same policies they have been championing, since when the economy does recover voters will come back around. In response, conservative commentators say the public sees a “causal nexus” between those policies and the economy’s dismal state — with the added implication that Democrats should seriously retool their policy prescriptions, presumably in a more conservative direction.

I have no doubt many voters see a connection between Obama’s policies and the state of the economy. If our leaders do X, and then things get worse, it’s understandable to assume that X contributed to that decline. But just because the assumption is understandable doesn’t make it right. And at this point, I think it’s pretty clear that without Republican obstructionism the stimulus would have been significantly larger, and thus even more effective at boosting employment.

Again, whether that boost would have been worth the cost is a fair question. But even then, I don’t see how you connect the stimulus’ cost to our current economic doldrums, given that the interest rate for 10-year government bonds is somewhere around 2.5 percent.* The size of our debt may very well hurt the economy eventually, but it isn’t hurting it now.

Wisdom of the American people or not, I just don’t see any way to escape the conclusion that any voter (or commentator or whatever) who sees “a causal nexus” between Obama’s policies and the economy’s current miseries is just plain wrong.

*It’s helpful to think of the interest rate on government bonds as the cost to the U.S. government of borrowing money. If interest rates are low (and 2.5 percent is relatively low) that means the cost of borrowing is low, which in turn indicates a confidence in the markets that the government can pay that borrowing off in due time.

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