Ezra Klein links to the Obama Administration Economic Policy memo written by Lawrence Summers in December 2008, posted by Ryan Lizza of the New Yorker. The executive summary of the memo makes the following statement, that might sound familiar to anyone who has listened to conservative attacks on the president:
We believe that $600 billion in stimulus over two years would create 2.5 million jobs relative to what would happen in the absence of stimulus. However, this falls well short of filling the job shortfall and would leave the unemployment rate at 8 percent two years from now.
I emphasized the last part because that’s what conservative pundits and politicians continue to point to in order to point out that the “stimulus failed.” What they almost never mention is the fact that those 8 percent numbers were based on the belief at the time that the peak of unemployment would be around 9%, if nothing was done. This is made clear in the preceding paragraph in the summary:
In the absence of fiscal stimulus the economy is projected to lose 3 to 4 million jobs in 2009. Together with the jobs we have already lost population growth, we will be 7 millions jobs short of full employment. The unemployment rate is projected to rise above 9 percent and not projected to start falling until 2011.
As Ezra points out, the situation was much, much worse than it was understood in December of 2008.
The economic miscalculation was that “forecasters now expect output to contract at least a five percent annual rate in 2008 Q4.” In fact, the contraction in the fourth quarter of 2008 was 9 percent — almost double what the forecasters anticipated.
Part of Obama’s problem as he seeks reelection is that it is very hard to argue a counterfactual. In other words, Obama’s job performance isn’t so much tied to the results of what he did, but rather they are tied to comparing those results to the unknowable results of not doing what he did. Without a stimulus, we argue, we might be in a depression, rather than (weakly) recovering from a very bad recession. (Some disagree.)
But rather than just leaving it at that, let’s focus on the facts that we do know.
- It is a fact that economists in December 2008 thought the economic damage in terms of GDP from the crash would be measured at about 5% and that it turned out to be 9%.
- It is a fact that the size of the stimulus package was crafted with these numbers in mind.
- It is a fact that when the Obama administration “predicted” that passing the stimulus would keep unemployment at around 8%, that they thought the consequences of not passing it would mean unemployment above 9%.
That the rate of unemployment went so high was a factor of the depth of the recession (9% in one quarter!) not due to a failure of Keynesian stimulative theory. Of course, some disagree.