Is the Recovery Act Working? You Bet It Is.

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Last Wednesday marked the one-year anniversary of the Recovery Act, also known as the “stimulus.” In the midst of the political gridlock that has stalled health care reform, it is easy to forget that President Obama started off his term with what undeniably was a major legislative accomplishment. In fact, the Recovery Act was one of the largest progressive achievements of our time, and one wonders whether Obama would still be considered ineffectual if it had been broken down into smaller pieces and passed individually throughout last year, rather than all at once. The media, after all, has a very short attention span, and tends to forget success quite easily.
 
But that’s just the perception of accomplishment. Did the Recovery Act actually accomplish what it was intended to do?
 
If you ask Republicans, the answer is an emphatic “NO.” The likes of former Speaker of the House Newt Gingrich, Minority Leader John Boehner, and the newly-minted Sen. Scott Brown (just to name a few) have all claimed that the Recovery Act “didn’t create one new job.” Are they right?
 
No. And not only are they wrong, but their assertion is pretty much impossible. Nearly $200 billion in government spending has gone out into the economy to date, and another $100 billion in tax cuts. That’s a lot of money, and if it didn't expand the economy, it must have done one of two other things: either devalued the currency with massive inflation or crowded out private investment by raising interest rates. It couldn't have just disappeared, it had to have gone somewhere. Arguing that you could pump $300 billion into the economy with no effect on GDP, inflation, or interest rates is like arguing that blowing into a balloon will have no effect, even in the absence of a leak. Think of this as the macroeconomic version of the 'First Law of Thermodymanics.'
 
Did inflation increase? Not in the slightest—in fact, the most recent figures show a 0.1 percent drop in “core inflation,” which excludes the more volatile food and fuel prices. This was the first monthly drop in core inflation since 1982. In other words, not only is the economy failing to show the large inflation necessary to absorb a $300 billion stimulus without affecting GDP or interest rates, it’s actually showing deflation.
 
What about interest rates? As the theory goes, a large stimulus package could boost demand for private capital. But with no concomitant increase in the supply of capital, the price of capital (i.e. interest rate) would rise, making it more expensive for businesses to invest and forcing them to pull back. In the end, one would merely be substituting public investment for private investment.
 
But as I’ve said before, interest rates on Treasury bills are at historic lows. The current rate on 10-year bills is about 3.7 percent—in contrast, the average between 1958 and 2008 was 6.7 percent. And for the 10 years preceding the current recession, the average was 4.9 percent. This is a strong sign that there isn’t a shortage of supply in the capital markets. If there were, interest rates would have risen tremendously, not fallen to historic lows.
 
So through this process of elimination, we can conclude that the Recovery Act must have had an effect on output and jobs. “But wait,” you say, “how is that the case when each month shows job losses and unimpressive GDP growth?"
 
Think of the economy as an aircraft carrier: It has a lot of inertia, and takes a long time to turn around. When we assess the effectiveness of the Recovery Act, we need to focus not on whether the economy is getting better, but whether the economy is getting worse less quickly. In other words, has the rate of deterioration slowed?
 
As the figure below shows, monthly job loss rates slowed almost immediately after the passage of the Recovery Act, and have been trending down ever since. Between the fourth quarter of 2008 and first quarter of 2009, the average monthly job loss rose from 650,000 to 750,000. In the first quarter that the Recovery Act had a significant effect (the second quarter of 2009), the average monthly job loss dropped to about 475,000. By the next quarter the job loss rate was cut by nearly half, to 260,000, and by the fourth quarter it was again cut, this time by more than a half, to 100,000.
 

 
This data, coupled with stock market growth, GDP growth, the recipient reports, Congressional Budget Office research (pdf), and private forecaster projections all reveal that the Recovery Act has been responsible for (1) keeping us out of a second Great Depression; (2) turning a rapidly deteriorating economy into a small-but-significant recovery; and (3) saving or creating nearly two million jobs. Even Republicans admit this when the cameras are turned off. 
 
Interested in reading more on the government's efforts to boost the economic recovery? Check out this piece on public investment in infrastructure, education and health.
 
(Photo credit: Pete Souza, White House photographer)