Proving a negative is always a challenge, but there's mounting evidence that the controversial $787 billion stimulus bill is achieving one of its major goals: shortening the recession. Economists at Goldman Sachs say that the bill, officially called the American Recovery and Reconstruction Act, has resulted in a 2%-3% boost to annual GDP in the second and third quarters of this year, turning what could have been a worsening recession into potential growth. For President Barack Obama, whose poll numbers have dropped precipitously from around 65% to around 50% as Americans have become worried about government spending and health-care reform, that should be good news: he fought hard against Republican opposition to push the bill through Congress as one of his first legislative acts, and the fact that it's working should be a vindication.
But it's not that easy. Recent polls show widespread disapproval of the stimulus bill: 51% of Americans polled last month by USA Today and Gallup said they thought the government should be spending less under the plan, while 44% said they thought the government was spending the right amount, or should be spending more. If anything, it seems, the stimulus plan is hurting the President even as it helps the country.
The most obvious reason for that disconnect is jobs: despite the signs of a turnaround, unemployment remains stubbornly high at 9.7%, with employers cutting 216,000 jobs in August. While jobs always trail economic rebounds, the unemployment number is higher than economists thought it would be, even in the worst case scenario forecast by the Treasury department's "stress tests" last spring. The point is not lost on Republicans, some of whom have argued lately that no more of the stimulus money should even be spent. "The metric of this bill was job creation," says Don Stewart, spokesman for the Senate's top Republican, Mitch McConnell, "and it hasn't done that."
Still, one would think that the mere infusion in six months of $88 billion into the economy — that's how much the government has spent so far...
Journalists, it goes without saying, are not very smart (maybe they suppress it because it impedes their ability to slice a complex world into neat stories) but a cruder, more flagrant example of the post hoc ergo propter hoc fallacy would be hard to find than the above. It seems quixotic, or Sisyphean, to remind people of the truism of economic history that it's normal for the economy to recover, that it always does so, even-- nay, especially-- when the government does nothing. The last time the US government did nothing in a recovery-- in the recession of 1920-21-- the recovery was especially robust. Again, in 1997-8, when the IMF forced East Asia to adopt austerity measures in the midst of recession, it earned itself the contempt of East Asians but rapidly restored growth to its former booming rates for another decade. By contrast, Keynesian policies failed in the US in the 1930s, in Japan in the 1990s, and dragged post-WWII Britain down from being the world's economic leader to a desperate, stagflation-ridden basketcase in the generation after the British economics profession surrendered to Keynes, before it was rescued by Thatcher.
So how does Keynesianism survive? Because of articles like the above, because of journalists committing the post hoc ergo propter hoc fallacy, while economists like Brad DeLong and Paul Krugman, who want bigger government because their values are different from the mainstream and want to use their technocratic credentials to sell big government to people who would not support it if they understood its true effects, back them up. Keynesian economics is like fortune-telling: shrewdly vague, it exploits a perennial fallacy, namely people's chronic inability to understand that the economy can recover on its own.
In this case, the journalist provides the key fact that makes the "stimulus worked" case implausible: only $88 billion has been spent, just over 10% of the whole stimulus package, and only about 0.6% of GDP, and all of that after the worst of the crisis-- October 2008-- had already been mitigated. By contrast, Ben Bernanke's Fed has bought hundreds of billions of dollars of private and federal debt, and the Bush administration "spent"-- albeit with a fair prospect of recovering-- $700 billion or so through the TARP program. If any stimulus is working, it's that of Bernanke and Paulson, which was not mere Keynesian spending-for-spending's-sake but a timely intervention by highly competent technocrats (we won't see such expert competence from neophyte Obama, but fortunately, we might not need it) targeted to the specific problems at the heart of systemic failure. That's not to give unqualified approval to Paulson. He's a tragic hybrid of hero and anti-hero: he probably did save the US from a more shattering crisis, but the fallout from the Paulson Plan is likely to be a more politicized financial sector and hugely increased incentives and opportunities for rent-seeking for years or decades to come. There's something to be said for the House GOP who voted against him, too.
For now, the American people seem to be displaying a sensible incredulity about the "stimulus is working" message. But don't count on it to last.