The Stimulus Failed, and This Is Why

The stimulus worked. It also failed.

The $800 billion Recovery Act worked because it raised GDP by up to three percentage points in the summer of 2009; it probably saved more than a million jobs; it stabilized disposable income; and it spared states from having to make dreadful cuts and tax increases to close their record budget shortfalls. But it also failed to keep unemployment from skyrocketing over 10 percent, and as the economy limps along through 2010 on the cusp of stagdeflation.

And so, just as it's fair to say a football offense played well by scoring 40 points even if it failed to win the game, it's fair to say the stimulus "worked" in that it accomplished goals commensurate to its price tag, even if it has failed to produce a V-shaped recovery.

Bruce Bartlett explains why:

For the past year, GDP has been about $2 trillion less than it would be if people and businesses were still spending their money as rapidly as they did previously. The collapse of the housing bubble and the stock market caused the net worth of households to fall by $15 trillion between the first quarter of 2007 and the first quarter of 2009, according to the Federal Reserve.

Nonfinancial companies are sitting on $1.8 trillion. Banks are sitting on excess reserves of $1 trillion. Families' net worth crashed $15 trillion between 2007 and 2009. Prevailing against that kind of head wind takes something extraordinary: a deft blend of demand-stimulating and confidence-stoking. As Bruce notes, "at this moment no one knows exactly how to do that."