How the Stimulus Has Propped Up the Economy

Not a day goes by without a conservative leader or media outlet arguing that the stimulus has been a failure and that uncontrolled government spending is only making the recession worse. Of course, this is nonsense. Worse, it is one of the most damaging lies that conservatives are now telling about the economy.

While the stimulus passed in 2009 didn't work the magic the Obama Administration predicted -- with unemployment rising higher than expected -- the main reason is that it was too small, not too big. In any case, it is clear that had there been no stimulus -- which is what many conservatives say they would have preferred -- the economy would be in much worse shape than it is. A report last year by the Congressional Budget Office found that the stimulus helped create or maintain several million jobs, increased GDP growth, and had other beneficial effects.

Another study last year by economists Mark Zandi (who advised John McCain in 2008) and Alan Blinder found much the same thing. Among other things, the report noted that the stimulus package included $175 billion in aid for the states, which prevented much steeper layoffs of public employees than would otherwise have occurred (as it is, 446,000 public employees have lost their jobs).

The report also estimated the "bang for the buck" produced by different elements of stimulus spending -- that is, the amount of economic activity generated for each dollar in stimulus. Extending unemployment insurance ($1.61), expanding food stamps ($1.74), increasing infrastructure spending ($1.57), and providing general aid to the states ($1.41) were the most stimulative parts of the jacked up federal spending that began in 2009.

One puzzle about the relentless conservative attacks on the stimulus is these criticisms seem to forget that 36 percent of stimulus was in the form of emergency tax breaks. Are conservatives saying this part didn't work either?

In fact, some tax cuts over the past two years have had positive stimulative effects. According to the Zandi/Blinder analysis, the most effective changes in tax policy were lump-sum rebates ($1.22), the payroll tax holiday ($1.24), and the job tax credit ($1.30). In contrast, the study estimated that extending the Bush income cuts and cuts on capital gain were net money-wasters, generating $.32 and $.37 for each dollar respectively.

(Given that even the good tax cuts were less stimulative than spending increases, it's clear that Obama should never have caved in on including so much tax relief as part of the stimulus -- especially since he's never gotten any credit for these cuts.)

Perhaps the most persuasive evidence of the stimulus's positive effect is that the recovery has stalled as the extra spending has tapered off. And this problem is about to get much worse. As the New York Times reports today, extended unemployment benefits -- one of the most powerful elements of stimulus -- are starting to run out and will entirely fade by the end of the year.

Meanwhile, the White House and Congress are busy cooking up deep budget cuts, some of which will take effect immediately. Stimulus worked, but repeated lies to the contrary have paved the way for an anti-stimulus deal.