What We Know and Don't Know About the Stimulus

Harvard Economist Edward Glaeser argues that although economists are in basic agreement about the direction of Wall Street reforms -- some combination of capital requirements and risk assessments would be prudent -- there is no similar consensus over the impact of Keynesian stimulus.

He produces this graph to argue that there is no statistically significant relationship between stimulus money spent and unemployment reduced on a state-by-state basis (if you take out Alaska and the Dakotas).

Even if this graph did clearly show that more stimulus money saves more jobs, you wouldn't know whether the money spent was actually "worth it," Glaeser argues. The number of jobs saved would have to be weighed against the money spent per job, the impact on the deficit, the opportunity cost of creating "make-work jobs" that produce little of value and waste folks' time.

Glaeser's right. We do not know, and cannot know, the true impact of the stimulus. The trouble with evaluating any relief effort is that we can't run two experiments on the US economy, one with a stimulus and one without a stimulus, and carefully measure the impact. All we have is the news, and since the news on jobs in the last two years has been horrible, many Americans assume that the stimulus failed.

And yet, there are stimulus advocates like myself. We'd point out that numerous economic research firms and the Congressional Budget Office found that the stimulus saved millions of jobs and raised output by up to three percentage points in the latter half of 2009. Or we'd note that since most of the early stimulus money went to help bear the burden of Medicaid and education spending, it could not have been expected to reverse the dramatic losses associated with the real estate collapse (four of the six states with the highest unemployment rates in January 2010 were among the highest in foreclosure rates).

Still, Glaeser's broader lesson is inevitable. When the recession bit, expansionary fiscal and monetary policy were the main tools we had available. But we don't know enough about how they work because, fortunately, dramatic recessions are rare, extraordinary events that are difficult to measure. The uncertainty principle of stimulus spending is important for humility, but it's important for politics. Democrats' oversold the impact of the stimulus and (maybe as a result) have since undersold the principle of deficit spending.