The recent release of the February employment report set off the predictable partisan squabbling, with Democrats emphasizing the positive (227,000 new jobs) and Republicans the negative (the still-high unemployment rate).
Democrats say the economic recovery shows that the stimulus bill that President Barack Obama signed in 2009 worked. Republicans deny it. Although we can’t know how the economy would be faring if Congress hadn’t passed a stimulus, we have good reason to doubt that it did much good.
Media fact-check organizations have no such doubts. Factcheck.org says it’s “just false” to deny that the stimulus has created jobs. It cites the Congressional Budget Office’s estimate that the stimulus had saved or created millions of jobs. But the CBO, as its director has explained, hasn’t really checked the effect of the stimulus. It has merely reported what the results of additional federal spending and tax credits would be if you assume that spending and tax credits are stimulative.
In other words: If you assume that stimulus works, it must have worked. This circularity doesn’t bother PolitiFact, a group that seeks to elevate the tone of political debates but usually lowers it. It says people who deny the effectiveness have their “pants on fire.”
Last summer, Dylan Matthews reviewed the research on the stimulus for the Washington Post and dug up six studies that found a positive effect. Three of them were based on models that assume the stimulus worked. Three of them were supposedly empirical confirmations of this effect. These three all found that states that got more stimulus money had stronger economic performances than places that received less.
Other research on the stimulus, meanwhile, has uncovered reasons for skepticism. John F. Cogan of the Hoover Institution and John B. Taylor of Stanford University have found that the federal aid to states that was in the stimulus reduced states’ borrowing. The transfer may have helped state balance sheets, but shifting debt from states to the federal government cannot have been stimulative.
Valerie Ramey of the University of California, San Diego, found the stimulus didn’t increase economic output or private-sector employment, although it boosted public-sector employment. (Maybe PolitiFact will give these economists a pants-on-fire citation, too.)
In a debate about the stimulus with Taylor, former Obama adviser Lawrence Summers made the point that states with more stimulus funding have done better.
The Fed’s role
What’s often left out of that story is the role of the Federal Reserve. Take account of how fiscal policy is likely to affect monetary policy, and it becomes a lot harder to see how stimulus can do much.
Assume, for example, that the central bank has a strict 2 percent target for inflation and is perfectly effective in hitting it. In that case, any stimulus that Congress provides is and must be canceled out by a tighter monetary policy. Or assume that the central bank always achieves a target of 4.5 percent growth in nominal income. Again, any added stimulus just causes the Fed to run a more contractionary (or less expansionary) monetary policy, and we end up with roughly the same level of output and employment.
The Fed in these situations may want Congress to provide stimulus, as Fed Chairman Ben Bernanke repeatedly urged, because the central bank would prefer to be able to run a tighter policy itself.
In retrospect, Obama would have been better off pushing for more Fed action in 2009 — for instance, the Fed could have stopped paying banks interest on reserves, announced a goal of restoring nominal income to trend, or both — and skipping the unpopular stimulus. The economy would probably be in the same shape, and we would certainly have less federal debt.
Ramesh Ponnuru is a Bloomberg View columnist and a senior editor at National Review.