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The “s” word

James Surowiecki wonders why “stimulus” has become a dirty word:

When President Obama unveiled an array of new tax-cut and spending proposals last week, one word was noticeably missing from his speeches: “stimulus.” Republicans, meanwhile, energetically set about decrying the plan as “more of the same failed ‘stimulus’ ” and as simply a “second stimulus”—as if the word itself were a damning indictment. The idea of using countercyclical fiscal policy to help get a weak economy moving is hardly radical. But in Washington stimulus has become the policy that dare not speak its name.

This wouldn’t be surprising if we were talking about a failed program. But, by any reasonable measure, the $800-billion stimulus package that Congress passed in the winter of 2009 was a clear, if limited, success. The Congressional Budget Office estimates that it reduced unemployment by somewhere between 0.8 and 1.7 per cent in recent months. Economists at various Wall Street houses suggest that it boosted G.D.P. by more than two per cent. And a recent study by Mark Zandi and Alan Blinder, economists from, respectively, Moody’s and Princeton, argues that, in the absence of the stimulus, unemployment would have risen above eleven per cent and that G.D.P. would have been almost half a trillion dollars lower. The weight of the evidence suggests that fiscal policy softened the impact of the recession, boosting demand, creating jobs, and helping the economy start growing again.

I want to point out once more that the estimates of the effect of the stimulus are not estimates. They are really just projections based on estimated past relationships rather than a direct measurement of whether the stimulus worked. Neither the CBO study nor Zandi and Blinder’s work tries to look directly at the impact of the spending on the economy. Once again, remember what the CBO said about its own estimates:

CBO has also examined incoming data on output and employment during the period since ARRA’s enactment. However, those data are not as helpful in determining ARRA’s economic effects as might be supposed, because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.

This is one of the most honest and depressing statements about the state of our knowledge of macroeconomics that I have ever seen. The CBO is admitting that the “new data”—what actually happened in the aftermath of the stimulus—cannot be used to evaluate the stimulus. Do you meed to know anything else about the “estimates?”