Wed, Feb 22, 2012 - Page 9 News List

Common sense says US stimulus policies did work

By Jeffrey Frankel

With November’s election in the US fast approaching, the Republican candidates seeking to challenge US President Barack Obama claim that his policies have done nothing to support recovery from the recession that he inherited in January 2009. If anything, they claim, Obama’s fiscal stimulus, the bank bailouts and US Federal Reserve Chairman Ben Bernanke’s aggressive monetary policy made matters worse.

Obama’s Democratic defenders counter that his policies staved off a second Great Depression and that the US economy has been steadily working its way out of a deep hole ever since.

Meanwhile, middle-ground observers typically conclude that one cannot settle the debate because one cannot know what would have happened otherwise.

There is a good case to be made that government policies — while not strong enough to return the economy rapidly to health — did halt an accelerating economic decline, but the middle-ground observers are right that one cannot prove what would have happened otherwise. It is also true that it is rare for a government’s policies to have a major impact on the economy immediately.

However, here is the remarkable thing: Whether one listens to the Republicans, the Democrats or the middle-ground observers, one gets the impression that economic statistics show no discernible improvement around the time that Obama took office. In fact, the reality could hardly be more different.

This is especially true if one looks at revised data, which show the US economy to have been in far worse shape in January 2009 than was reported at the time. The annualized growth rate in the second half of 2008 was officially estimated to have been minus-2.2 percent, but current figures reveal the contraction to have been much sharper — a horrendous minus-6.3 percent.

This is the main reason why economic activity in 2009 and 2010 was so much lower than had been forecast — and why unemployment was so much higher.

The maximum rate of economic contraction — veritable free fall — came in the last quarter of 2008. More specifically, according to the monthly GDP estimates from the highly respected forecaster Macroeconomic Advisers, it came in December 2008 — the month before Obama was inaugurated. However, the growth trajectory miraculously reversed as soon as Obama’s term began, yielding a clear “V” pattern in 2008 and 2009.

The full force of the fiscal stimulus package began to go into effect in the second quarter of 2009, with the US National Bureau of Economic Research officially designating the end of the recession as having come in June of that year. Real GDP growth turned positive in the third quarter, but slowed again in late 2010 and early last year, which coincides with the beginning of the withdrawal of the Obama administration’s fiscal stimulus.

Other economic indicators, such as interest-rate spreads and the rate of job loss, also turned around in early 2009. Labor-market recovery normally lags behind that of GDP — hence the “jobless recoveries” of recent decades. However, official data on monthly job losses and gains reveal an obvious “V” shape here, too. The end of the free fall for private-sector employment came precisely when Obama was inaugurated.

Again, such data do not demonstrate that Obama’s policies yielded an immediate payoff. In addition to the lags in policies’ effects, many other factors influence the economy every month, making it difficult to disentangle the true causes underlying particular outcomes.

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