Making Sense of Stimulus Spending

President Obama has said that "the American Recovery and Reinvestment Act has saved or created nearly 150,000 jobs." That’s always been a soft statistic, as we explained on the FactCheck Wire in May. The President’s Council of Economic Advisers hasn’t actually counted those 150,000 jobs. It’s a rough projection based on calculations made before Obama even took office.

There’s a lot of educated guesswork in the original document, dated Jan. 9. It was produced by Christina Romer, who is now chair of Obama’s Council of Economic Advisers, and Jared Bernstein, who holds the title of "chief economist" to Vice President Joe Biden. The Romer-Bernstein study assumed (among other things) a "rule of thumb" that a 1 percent increase in economic output (measured by gross domestic product or GDP) roughly equals 1 million jobs. Those are pretty round figures. As the authors stated: "Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode."

Not "Exactly"

They can say that again. As it has turned out so far, those estimates sure haven’t applied "exactly," or even very closely.

The Obama team originally estimated, for example, that unless a stimulus plan was enacted, the unemployment rate would reach nearly 9 percent sometime in the first three months of next year, as shown by this chart, which we copied from the original Romer-Bernstein study:

But as things have turned out, even with the big spending package in place, the jobless rate shot up to 9.4 percent in May, according to the most recent figures from the U.S. Bureau of Labor Statistics. Here’s how the real, monthly jobless figures look when plotted on the Obama team’s own chart, with the red dots indicating the actual rates:

The second chart was created by "Geoff" at the Web site Innocent Bystanders. We’ve checked it and can vouch for its accuracy. The Obama team did not give the precise figures that lie behind their chart, and the chart is based on quarterly figures while the BLS figures are monthly. Nevertheless, this chart gives a reasonably good picture of how far off the Obama team’s projections have turned out to be, at least so far.

Update, June 17: We contacted "Geoff" and can now report that he is Geoff Campbell, a research and development engineer living in Colorado. "I made this particular chart because the news media rarely provides decent historical perspective on today’s news, so you can’t easily tell where we were and how we got to where we are," he said in an exchange of e-mails. Thanks, Geoff.

Not surprisingly, Republicans are pouncing on this. Republican Rep. Darrell Issa of California and five other GOP members of the House Committee on Oversight and Government Reform signed a June 11 letter complaining that the administration had used murky methods to support its claims. They accused the Obama team of using "creative models to produce speculative macroeconomic forecasts" and asked for detailed explanations of the "factors and theories" behind the administration’s projections.

A  Republican Party Web page calls the 150,000 figure "fiction" and accuses the president of using "fuzzy math." House Republican Whip Eric Cantor of Virginia said during an interview on MSNBC June 11: "[W]e were told that unemployment would not exceed 8 percent if we passed the stimulus bill. … Well, now what we’re seeing, obviously, is over 9 percent."

 The White House Explanation

White House officials have a simple explanation for all this. They say President George Bush left them a worse mess than they realized when Romer and Bernstein came up with their predictions. White House Press Secretary Robert Gibbs and Bernstein laid this out in a press briefing on June 8. When asked about the discrepancy between his projections and the actual May unemployment figures, Bernstein said:

Bernstein: Well, first of all, let’s be very clear about this point. Our forecast at that time was right in the middle of every other forecast, and in fact, if we had had a forecast that was much worse than that, we would have been an outlier. We also would have been correct, it turned out. But the point is that the contraction of the economy in the fourth quarter – you should recall back then that was – the magnitude of that contraction was far larger than was expected. And so at the time our forecast seemed reasonable. Now, looking back, it was clearly too optimistic.

 

What I will say, though, and I don’t want to lose sight of this, is that the American Recovery and Reinvestment Act, in our view, according to our analysis, will lead to an unemployment rate by the end of next year of 1.5 to 2 points lower than would otherwise be the case. And that is the direct result of the kinds of programs and projects we’re talking about today, putting literally millions of people back to work who in the absence of this program would not be getting fully employed.

So Bernstein is sticking to the prediction that unemployment will be substantially lower with the stimulus bill than without. On that point there’s good economic theory to support him. Last October, for example, Republican economist Martin Feldstein, who had been Ronald Reagan’s chief economic adviser, wrote in the Washington Post: "The only way to prevent a deepening recession will be a temporary program of increased government spending." He argued for a package in the hundreds of billions of dollars. Later Feldstein wrote that the package Congress was considering was "a mistake" and said it should concentrate more on military spending and temporary tax credits for such things as home improvements and buying automobiles. But he added: "The problem with the current stimulus plan is not that it is too big."

But this time Bernstein is wisely refraining from saying where the jobs figures would be without the stimulus package. Wherever the jobless rate peaks, he’s saying it would be 1.5 percent to 2 percent higher if the stimulus package had not been enacted.

Is that so? We know of no way to prove or disprove such a claim. What we can say is that in the three months after the stimulus bill was signed Feb. 18, the economy lost more than 1.5 million jobs, according to the BLS. So even if the president’s 150,000-jobs claim is correct, that’s about 10 percent of the total jobs lost.

Footnote: The Council of Economic Advisers is required to report periodically on "total job creation" produced by the stimulus spending, but that will also be a somewhat soft number. As noted in the first quarterly report issued under the stimulus act, "Total job creation includes direct, indirect, and induced jobs which are estimated using an econometric model."

"Direct" jobs are those created in government-sponsored projects and can be counted up in a fairly straightforward fashion. "Indirect" jobs are those that suppliers may add as they make the materials used in the project. But "induced" jobs are those that economists assume show up elsewhere in the economy as workers and firms who benefit from stimulus money spend more to buy goods and services. These might include retail sales jobs. The number of those jobs can only be estimated.

– by Brooks Jackson, with Justin Bank and Andrew Karter

Correction, June 17: We originally misstated the dates of Rep. Issa’s letter and Rep. Cantor’s interview as Jan. 11.

Update, July 2: See our post on the FactCheck Wire for an updated chart showing the real unemployment rate versus the predictions of administration economists.