In his latest New York Times column, Paul Krugman writes:
Voters have been told over and over again that the 2009 stimulus didn’t work (actually it did, but it wasn’t big enough), and a few days before a national election is no time to try to change that big a false belief.
Oh, okay. It worked. Right. Here is what the Obama administration promised with its economic “recovery” plan, from a report by Christina Romer and Jared Bernstein, “The Job Impact of the American Recovery and Reinvestment Plan”:
So we were told that the plan would keep unemployment down to about 7%, but that without the “stimulus”, the unemployment rate would peak way up at 8.8%. Now here is an updated version of the same chart (from James Pethokoukis), showing where unemployment has actually been (in red):
Now, you might not think the “stimulus” was exactly a success. Notice that the Obama administration promised unemployment would be at around 5.6% by now, while it was in fact at 7.8% as of last month, still higher than where they said it would peak if the “stimulus” package was passed.
Now, one might be tempted to argue that this is evidence that it not only didn’t work, but made the problem even worse. And in another New York Times op-ed, Romer addressed the argument that goes sometime like this:
[W]e spent $800 billion on the stimulus, yet unemployment still rose to 10 percent — so obviously it wasn’t helpful.
This is wrong, she said. Her explanation was this:
Without knowing where the economy was headed in the absence of the stimulus, it’s impossible to judge what it contributed just from what happened afterward.
She allows that the “stimulus” was “flawed”:
Most obviously, it was too small.
1) She just starts with the assumption that the “stimulus” has “contributed”. The fact that it was “[n]ot the knockout punch the administration had hoped for” doesn’t mean it didn’t help the economy, she argues, on the basis of the assumption that it would have been even worse without it.
2) How very convenient to have argued when pushing the “stimulus” plan that they knew where the economy was headed, to be able to assure that without it, unemployment would reach nearly 9% and with it, they would get it down to 7%—and yet when, after having passed the plan, unemployment reaches 10% and still hasn’t gotten down to 7%, suddenly the reason is because we don’t know “where the economy was headed in the absence of the stimulus”.
If absence of knowledge about where the economy would be absent the “stimulus” is her best defense, how can she possibly at the same time conclude that it “contributed”? Would not that require knowing “where the economy was headed in the absence of the stimulus”? And if they did not know where it was headed, why did they claim otherwise as an argument to pass the plan through Congress? Hmm…
Granted, it is theoretically possible that without the “stimulus”, unemployment would have well exceeded 10%. Perhaps it would have been 12%, or 14%, or even higher, without it. But then, perhaps without it, the unemployment rate would have peaked at the 8.8% originally projected absent the “stimulus” plan. On the face of it, looking at the actual data, it doesn’t look too good for the Keynesian solutions advocated by the likes of Krugman and Romer.
Robert P. Murphy discusses this “stimulus” data at more length, as well as other problems with Keynesian solutions to the problems caused by Keynesian prescriptions in this video.
This kind of argument is standard for Krugman. He advocates a policy and then, when it doesn’t work, he argues that it did work, it’s just that things would have been even worse without it. Thus, following the bursting of the dot-com bubble, Krugman wrote that “recessions are not a serious problem for large, modern economies” and prescribed that the Federal Reserve “cut interest rates a couple of percentage points, provide plenty of liquidity, and call me in the morning.” That was precisely what the Fed did, and Krugman declared, “Another few shots in the arm like that and talk of recession might well evaporate.” But then, despite the rate cuts, the economy still slid into a recession. But instead of acknowledging that he had been wrong, Krugman just argued that the Fed hadn’t cut enough, and then advocated the Fed cut long-term interest rates in order to create a housing bubble. And we all know how well that worked out.
For more on Krugman’s record on the housing bubble, see my book, Ron Paul vs. Paul Krugman: Austrian vs. Keynesian economics in the financial crisis.