Romney and Ryan: Authors of Economic Fiction
During the Great Recession (December 2007 – June 2009), the economy shed about 7.4 million jobs. Sixty percent of these jobs, about 4.4 million, were lost by the time President Obama took office in January 2009 with the remainder disappearing over the next five months. The Congressional Budget Office estimated that over the period 2009-2011, the GDP gap (the difference between actual GDP and potential GDP) would total almost $2.7 trillion in the absence of policy changes. Because conventional expansionary monetary policy had seemed to run its course with interest rates already near the zero lower bound, many economists believed that fiscal stimulus was in order. Such was the conclusion of administration economists and, as a result, President Obama proposed the American Recovery and Reinvestment Act (ARRA). The size and composition of the stimulus funds were structured in large part to gain bipartisan support by seeking political approval from House and Senate Republicans. Specifically, though the Chair of the President’s Council of Economic Advisors, Christine Romer, advocated a stimulus plan of about $1.5 trillion, Lawrence Summers argued that a plan of such magnitude would be politically impossible to push through Congress and suggested the (eventually enacted) smaller figure of around $800 billion. Additionally, political negotiations over the plan resulted in a substantial reallocation of stimulus funds from aid to state and local governments and infrastructure spending to individual tax cuts. To those economists advocating fiscal stimulus, the ARRA was much too small and much too reliant on tax cuts rather than direct government spending for stimulus. The irony of course is that the administration’s compromises garnered not one vote from House Republicans and only three votes from Senate Republicans.
Now aside from the likelihood that the ARRA was too small and ill-structured, did it have any positive impact on the economy and on jobs? According to Romney and Ryan, the answer is a categorical “no”. Indeed, Tweedle-Dee and Tweedle-Dum keep clamoring that not only did the President’s policy not work but it made things worse.
Please understand this. These assertions are so much at odds with the preponderance of evidence that they can reasonably be considered as outright lies. There have been some 14 analyses of the President’s stimulus plan, excluding the study conducted by the President’s own Council of Economic Advisors. Eleven of these conclude that the stimulus worked, one concludes that it may or may not have worked, and the remaining two conclude that it did not work. Of the two concluding that the stimulus did not work, one bases its conclusion on statistically insignificant results while the other’s results could also be interpreted as evidence that the stimulus was too small and should have been weighted more heavily towards direct government purchases.
So what did some of the other studies conclude? Zandi and Blinder (2010) state that “…the effects of the fiscal stimulus alone appear very substantial, raising 2010 real GDP by about 3.4%, holding the unem¬ployment rate about 1½ percentage points lower, and adding almost 2.7 million jobs to U.S. payrolls.” In a 2011 study, CBO economists Benjamin Page and Felix Reichling estimate that in 2010 the ARRA increased GDP between 1.5 and 4.2 percent, decreased the unemployment rate between 0.7 and 1.8 percentage points, and increased FTE employment between 1.9 and 4.8 million jobs relative to what would have happened in its absence. Wilson (2011) concludes that “…results indicate that ARRA spending had a positive and statistically significant impact on total nonfarm employment at the one-year mark after the legislation was enacted. It also had a positive and significant impact on employment in the subsectors of state and local government, construction, manufacturing and, depending on which measure of stimulus spending one uses, the education and health sectors.” Finally, results from Chodorow-Reich, et al. (2011) provide evidence that “…the ARRA transfers to states had an economically large and statistically robust positive effect on employment” and suggest that “… a marginal $100,000 in Medicaid transfers resulted in 3.8 net job-years of total employment.” Importantly, the authors emphasize that the “…effect is precisely estimated, and we can reject the null hypothesis that the spending had no effect on employment with a high degree of confidence.”
If you don’t want to bother with looking at studies, just look at the data. Since the end of the recession (June 2009) almost 2.7 million jobs have been created. Even if one (unjustifiably) assigns the blame for the jobs lost from March 2009 through June 2009 to President Obama, there’s still been a net gain of 316,000 jobs. Now, should the recovery be proceeding at a more rapid pace? Absolutely. And it would be if (1) the ARRA had been larger are more targeted to direct government spending and aid to state and local governments and/or (2) had Congress enacted Obama’s second stimulus proposal the American Jobs Act.
Romney and Ryan are peddling fiction about Obama’s fiscal stimulus plan and its impact on output, unemployment, and jobs. As important, they are peddling fiction about their own budget plan. Realistically, the numbers don’t add up. To compensate for the revenue losses their proposed reductions in marginal tax rates would entail, they would have to eliminate or scale back substantially items like the home mortgage interest deduction, the deduction for charitable contributions, and the exclusion from income of employer sponsored health insurance. That is not going to happen. Nor is there any possibility of enacting $5 trillion worth of discretionary spending cuts over the next decade as Ryan proposed in his Path to Prosperity. Look, according to the CBO, federal discretionary spending in 2011 was $1.277 trillion, comprised of $712 billion in defense spending and $565 billion in non-defense spending. Given that defense spending in all likelihood will not bear the brunt of the cuts, to achieve the $5 trillion target would mean eliminating spending on non-defense related activities over the next ten years almost entirely! Their’s is not, repeat, is not, a serious budget proposal. It is fiction.