Stimulus Worked in 2009. Next Time It’ll Have to Work Better.
(Bloomberg Opinion) -- It’s been a decade since Congress approved a huge emergency package of spending projects, payments to individuals and tax cuts to stimulate a U.S. economy staggered by the 2008 recession. We know now that it worked, limiting the damage caused by the downturn and vindicating the idea that government spending during periods of economic weakness saves jobs and speeds recovery. We also know that it could have worked better.
As an admittedly biased participant — I was the U.S. budget director when President Barack Obama signed the stimulus legislation on Feb. 17, 2009 — I offer eight lessons based on recent history and amid fears that the next recession might not be far away:
- Fiscal stimulus works. A wide array of research and evidence analyzed by economists such as Jason Furman of Harvard University, Alan Blinder of Princeton University and Mark Zandi of Moodys Analytics shows that without the stimulus package, “the recession would have been much deeper and more prolonged,” in Furman’s words.
- Acting quickly matters. Critics of fiscal stimulus plans in general argue that they usually hit the economy too late to be effective because they take a long time to enact. As Blinder wrote in a 2004 paper, “At least in the United States, long political lags may be the most cogent argument against discretionary fiscal policy.” By contrast, the 2009 stimulus was put in place only one month after Obama took office.
- Don’t bank on bipartisanship. The 2009 stimulus marked the point at which the trend toward political polarization finally overwhelmed the legislative process. Given the political science literature on rising polarization, we in the Obama administration should not have hoped that the legislation would ever have been bipartisan. In the end, the vote on the stimulus package was entirely partisan in the House of Representatives and nearly so in the Senate, and few Republicans would have voted for it even if the stimulus components had been changed. Without a major shift in the political landscape, future administrations should not wait for the other party to show up.
- The problem with the stimulus was not that it was too small, but rather that it did not last long enough. Liberal critics of the package have argued that the $831 billion eventually pumped into the economy by the American Recovery and Reinvestment Act wasn’t enough in the face of such a profound crisis. Actually, though, the problem wasn’t spending too little per year but rather too few years. It’s not clear that much more could have been effectively delivered in the second quarter of 2010 than the well over $100 billion included in the stimulus for that period. But it’s clear that the federal government could have spent more than the $10 billion supplied by the package in the second quarter of 2012. The lesson is to take more account of economic uncertainty in future legislation.
- Plan for the unexpected. The best way to have extended the effect of the stimulus package would have been to include more provisions for providing fiscal support to the economy so long as it remained weak, instead of requiring congressional action each time an adjustment was needed. Examples might have included making the tax cuts and fiscal help for state governments persist as long as the unemployment rate remained above some level. Any future stimulus should build in future adjustments contingent on changing circumstances.
- Don’t fall in love with economic models. The Obama administration was too optimistic about the pace of recovery because the models it was using expected the economy to rebound from the 2007 housing crisis as quickly as it responded to the collapse of technology company stocks in 2000. The difference, however, is that the tech losses weren’t concentrated in highly leveraged financial institutions, as the housing losses were. Economic models generally include little detail about the financial sector, and so they missed this key point in 2009. The lesson is that if a model mostly excludes a factor central to what the economy is currently experiencing, don’t believe the model.
- Don’t try to fix too many problems at once. Some critics faulted Obama for being too timid about using the financial crisis to enact far-reaching changes in the workings of the U.S. economy. They’re wrong. The stimulus legislation actually did include structural changes, such as those that spurred digitization of the health sector and encouraged the growth of renewable energy production, as the journalist Michael Grunwald and others have correctly argued. Trying to include other sweeping changes in a contentious political environment would have endangered enactment of the stimulus package and hurt the economy. It also would have undermined prospects for passing the Affordable Care Act, which later became the most important structural change in the economy by transforming the delivery of health care.
- Build in insurance for the future. Instead of letting fear and uncertainty (nobody actually knows how big a deficit is too big) impede investments in infrastructure, education, green energy and other needs in good times, or another round of stimulus in bad times, policymakers should devise deficit-reduction measures that take effect gradually in the future. That way, the fiscal measures are more likely to be accepted politically (since it’s easier to vote for pain tomorrow than pain today), and they’d provide an insurance policy against potential fiscal problems (since it’s easier to allow a scheduled change to take effect than to vote for one to take effect immediately). Yes, it’s hard to enact such changes today, but no, building in the ability to undo them does not mean they are likely to be undone. The best example of such backloaded fiscal discipline is the legislation enacted in 1983 to raise the normal retirement age under Social Security. It’s been increasing for the past two years, will continue rising very slowly through 2022 and has not attracted significant opposition even from those on the progressive left who promise never to raise it. Gradual but delayed fiscal discipline allows experimentation with potentially risky fiscal tools like running bigger budget deficits — experiments that will prove useful if the U.S. soon needs another round of fiscal stimulus as the economy weakens.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Peter R. Orszag is a Bloomberg Opinion columnist. He is a vice chairman of investment banking at Lazard. He was director of the Office of Management and Budget from 2009 to 2010, and director of the Congressional Budget Office from 2007 to 2008.
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