In early 2009, before Obama even took office, his team published The Job Impact of the American Recovery and Reinvestment Plan, which included this snippet:
The U.S. economy has already lost nearly 2.6 million jobs since the business cycle peak in December 2007. In the absence of stimulus, the economy could lose another 3 to 4 million more. Thus, we are working to counter a potential total job loss of at least 5 million. As Figure 1 shows, even with the large prototypical package, the unemployment rate in 2010Q4 is predicted to be approximately 7.0%, which is well below the approximately 8.8% that would result in the absence of a plan.
Here’s what that looks like in a graph.
Of course, this turned out to be wildly off base. Here’s what the unemployment rate did, from the Bureau of Labor Statistics:
One of the economists who was responsible for the unemployment projections from the incoming Obama administration was Jared Bernstein, who was quoted by CSN News on the reasons for the misguided forecast:
“Look, we made that projection back in 2008 at a time when the most recent information about the economy was that it was contracting at a rate of less than 1 percent,” Bernstein said. “At the time, we simply didn’t have good information. We now know with revised data that in the very quarter where we made that wrong projection, the economy was contracting at almost 9 percent.”
“So the statistics were way off at the time,” Bernstein continued. “It’s also the case that that forecast that we gave back then was the consensus forecast of the economics community. I mean, it wasn’t just that we were wrong. Everyone was wrong. And I think it’s largely because we just didn’t have a clear picture yet of how bad this recession actually was going to be.”
Part of what Bernstein says is flatly untrue: “Everyone was wrong.” In the big scheme of things, everyone is wrong in some respect, and if we split enough hairs, then every economic projection is wrong on some detail.
But it was obvious to many of us at the time — even before Obama took office — that there was no way the unemployment rate was going to stay below 8 percent.
Check out this graph from The Employment Situation from the Bureau of Labor Statistic in January 2009, just days before President-elect Obama’s team published the above analysis:
That shows unemployment increasing at a rate of .4 percent per month.
Employment trends don’t just suddenly turn on a dime. Employment is a lagging indicator of economic conditions: employers are generally reluctant to lay off trained employees and they’re almost always reluctant to hire new ones until they are certain that business conditions demand it.
So even if economists had been correct about their assessments of the depth of the recession in late 2008, we were going to see the unemployment rate balloon over 8 percent — probably 9 percent even with the stimulus.
But since economic conditions were far worse than the consensus, the rate went a point higher than that.
Also, the projection in early January seems to assume that the stimulus would pass pretty much immediately and go very, very quickly into effect.
A few points about all this:
- Claiming the stimulus would keep the rate below 8 percent was ridiculous from an economic perspective, even at the time with the available data, but it was even more ridiculous from a political perspective. Obama and his team opened themselves up for endless criticism from the time he took office.
- The fact that the projection was too low in the first place does not mean that the stimulus and all the other actions that the Obama administration took in its first months were ineffective.
- The ARRA provided hundreds of millions in stimulative tax cuts, forestalled massive cuts in state government spending and employment, and filled other major holes in the economy. Without the stimulus, I’m guessing we would have seen the unemployment rate rise to at least 12 percent.
- Without the stimulus and other aggressive administration actions — like the auto industry bailout — we would probably have seen the rate go to at least 15 percent, maybe considerably higher.
So the problem wasn’t that the “stimulus didn’t work,” as many now argue. The stimulus spending helped stopped the bleeding and certainly kept the unemployment rate lower than it otherwise would have been.
But the stimulus was of insufficient scale to fill in the huge hole in the economy left by the housing bust and the financial crisis. I wrote a post about this in July 2011: Larry Summers on the insufficient stimulus.
Should the Obama administration have pushed for an even larger stimulus package? It would have helped the economy in the short run but it would have created even more debt.
Could the Obama administration have gotten a larger package through Congress if their numbers had been more accurate from the beginning? I kind of doubt it.
Should the Obama administration have not pushed for a stimulus package at all and just let the economy keep spiraling downward? That’s what many Americans seem to think should have happened, but we would have likely ended up with Depression-level numbers for GDP and unemployment for at least several quarters.