President Obama says "every economist who's looked at it says that the Recovery Act has done its job"—i.e., the stimulus bill has turned the economy around. That's nonsense. Opinions differ widely and many leading economists believe that its impact has been small. Why? The expectation of future spending and future tax hikes to pay for the stimulus and Mr. Obama's vast expansion of government are offsetting the direct short-run expansionary effect. That is standard in all macroeconomic theories.It's generous to blame his staff rather than indicate that Obama is just telling whoppers.
So, as I and others warned in 2008, the permanent government expansion and higher tax rate agenda is a classic example of what not to do during bad economic times. Worse yet, all the subsidies, bailouts, regulations and mandates are forcing noncommercial decisions on the economy, which now awaits literally thousands of new diktats as a result of things like ObamaCare and the financial reform bill. The uncertainty is impeding investment and hiring.
The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy. (The University of Chicago's Harald Uhlig estimates $3.40 of lost output for every dollar of government spending.) Either the president is not being told of serious alternative viewpoints, or serious viewpoints are defined as only those that support his position. In either case, he is being ill-served by his staff.
Mr. Obama's economic statements are increasingly divorced not only from competing viewpoints but from those of his own economic advisers. It is surprising how many numerically challenged pronouncements come from this most scripted and political of White Houses. One slip is eventually forgiven, but when a pattern emerges, no one believes it is an accident.As Boskin points out, what has really saved us from sinking even further has been the Fed's policies. But that is too complicated for Obama to explain from his teleprompter and besides, wouldn't give the Democrats the political credit they're claiming.
For example, on the anniversary of the stimulus bill, Mr. Obama declared, "It is largely thanks to the Recovery Act that a second Depression is no longer a possibility." Yet his Council of Economic Advisers just estimated the stimulus bill's effect on GDP at its trough was 1%-2%.
The most common definition of a depression is a long period in which GDP or consumption declines at least 10%. The decline in GDP in the recent recession was 3.8%, in consumption 2%. No one disputes the recession was severe, but to reach a 10% GDP decline requires tripling the administration's estimate (three times their 2% effect) added to the actual 3.8% decline. On the alternative consumption standard, the math is even more absurd. The depression statement isn't credible. The stimulus bill has assumed certain mystic powers in administration discourse, but revoking the laws of arithmetic shouldn't be one of them.
And we can't really blame the President's economic advisers since, as Boskin points out, Obama is claiming things contrary to what those economists are saying.
On his recent "Recovery Tour," Mr. Obama boasted, "The stimulus bill prevented the unemployment rate from "getting up to . . . 15%." But the president's own chief economic adviser, Christina Romer, has estimated that the stimulus bill reduced peak unemployment by one percentage point—i.e., since the unemployment rate peaked at 10.1%, it prevented the unemployment rate from rising to just over 11%. So Mr. Obama claims that the stimulus bill was several times more potent than his chief economic adviser estimates.But the President is a politician, not an economist. So he figures that he can just go out and claim success for the stimulus and lie about all economist s agreeing with him. He figures that, if he says it enough, people will actually believe it. Perhaps so. But when one out of ten people is out of work, it's a bit difficult to believe that the Democrats' stimulus has been such a success.
Perhaps the most serious disconnect concerns the impending expiration of the 2001 and 2003 tax cuts, which will raise the top two income tax rates and the rates on dividends and capital gains. If these growth inhibiting tax increases occur—about $75 billion in tax increases next year, $1.4 trillion over 10 years—there will be serious economic damage.
In the most recent issue of the American Economic Review, Ms. Romer (and her husband David H. Romer) conclude that "tax increases are highly contractionary . . . tax cuts have very large and persistent positive output effects." Their estimates imply the tax increases would depress GDP by roughly half the growth rate in this so-far-anemic recovery.