Last week, David Leonhardt wrote:
In the weeks just before President Obama took office, his economic advisers made a mistake. They got a little carried away with hope.
There are two possible explanations that the administration was so wrong. And sorting through them matters a great deal, because they point in opposite policy directions.
The first explanation is that the economy has deteriorated because the stimulus package failed. Some critics say that stimulus just doesn’t work, while others argue that this particular package was too small or too badly constructed to make a difference.
The second answer is that the economy has deteriorated in spite of the stimulus. In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it.
To me, the evidence is fairly compelling that the second answer is the right one.
I think that Leonhardt is conflating the two main points. First, there is a question as to whether the economy is worse than the current administration expected. If we believe their forecasts, one can have little doubt than it is worse than they expected (see this graph via Calculated Risk). This then begs the question as to whether the stimulus is insufficient to combat the downturn. Leonhardt seems to say that the economy is worse than expected and thus the stimulus has been insufficient:
In other words, the patient is not as sick as he would have been without the medicine he received. But he is a lot sicker than doctors realized when they prescribed it.
However, the fact that the economy is worse than expected does not necessarily mean that the stimulus is not big enough.
Frequent readers of the blog are aware of the fact that I am not a fan of fiscal stimulus. Nonetheless, the reason that I am so skeptical that the stimulus has not worked to date is not because of my aversion to fiscal stimulus, but rather because it has barely been tried! The government has spent something like $50 billion of the total of over $800 billion to date. In other words, only about 5% of the total money that was allocated for stimulus has been spent. How then are we to claim that the stimulus was not big enough?!
This is not to say that the stimulus package will eventually be a success. Nevertheless, it is too soon to say that it has failed.
UPDATE: Free Exchange raises much the same point:
GAO’s figures do suggest that it’s a little premature to be expecting much of the stimulus or passing judgment on it. Of the planned outlays in the stimulus, roughly $49 billion is targeted for spending in 2009, of which only about $29 billion has been spent. That $29 billion is only slightly larger than California’s state budget gap; it’s just not enough to make much of a dent in the broader downturn.
Of course, the spending isn’t the only part of the stimulus bill. The share of the fiscal boost already in the system increases to perhaps 15% if one includes the tax provisions. And Jan Hatzius is arguing that a far larger share of the actual impact of the bill has been felt than 10%. The net stimulative impact of the package isn’t an easy thing to measure, as it turns out.