Tuesday, July 13, 2010

A Good Time to Measure

Copyright, The New York Times Company

The tax cuts and public spending increases from the American Recovery and Reinvestment Act of 2009 are coming to an end, and economists and politicians disagree as to whether the federal government’s “stimulus” should continue. But the conclusion of the act offers a unique opportunity to measure the impact of fiscal stimulus.

The Obama administration and its supporters promised that the fiscal stimulus law would create or save more than three million jobs by now. Their stated intention was to have the government spending while the economy was weak, then end the extra spending when the economy was recovering on its own.

But instead of adding jobs since the law was passed in February 2009, our economy has reduced employment by more than two million.

Some of us think that the fiscal stimulus made a bad situation worse, and that employment would have grown, or fallen less, if the stimulus law had not been passed. The Obama administration contends that, apart from the stimulus law, the economy is worse than anyone expected, and that the law kept the drop in unemployment to two million, rather than more than five million.

We probably will never know how much the economy would have grown or shrunk in 2009 and 2010 without the stimulus law and thus cannot disprove the argument that events outside the federal government were destroying jobs faster than the federal government could ramp up its spending.

But the 2010 fiscal year is coming to an end in less than three months, so that almost three-quarters of the law’s spending boosts and tax cuts are behind us. In the 2011 fiscal year, the law’s combined tax cuts and extra spending will be $265 billion less than in the current fiscal year.

If stimulus advocates are correct that this recession is deeper and longer than they thought, for reasons beyond the federal government’s control, then having the government now tighten its belt by $265 billion will cause employment to fall as much as another million from its currently stimulated levels.

If the stimulus skeptics are correct, then fiscal 2011 will finally be a time when the private economy can grow. We’re only a few employment reports away from resolving this debate.

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