March 14, 2012
Dean Baker
Debate Club (U.S. News & World Report), March 13, 2012
See article on original website
There should be little doubt that President Obama deserves credit for what recovery we are seeing; although he also must share in the blame for it not being faster. The basic story of this downturn is very simple: There was a plunge in private-sector demand after the collapse of the housing bubble.
The $8 trillion housing bubble had generated more than $1 trillion in annual demand both from its direct impact on construction and through the effect that bubble-inflated house prices had in spurring consumption. When this bubble burst, there was nothing to replace this gap in demand.
This is where the stimulus came in. The government had to fill the gap in demand. This fact has nothing to do with how much we like the government compared with the private sector. Private businesses were not about to increase their investment by $1 trillion (this would be doubling annual investment) at a time when the economy was in the tank. That doesn’t make any sense.
President Obama’s stimulus helped fill the gap in demand. At this point there have been numerous studies by independent economists, including the non-partisan Congressional Budget Office, almost all of which find that the stimulus created between 2 million and 3 million jobs. This was an important boost to the economy at a time when it desperately needed it. It is important to remember that President Obama had to push through this stimulus over the near-unanimous opposition of the Republicans in Congress.
The contrary claims by Republicans that the stimulus blocked recovery literally do not make any sense. Is there any employer anywhere who didn’t hire workers because stimulus money allowed state and local governments to keep teachers and firefighters employed? Is there a restaurant or factory that cancelled expansion plans because roads and bridges in the area were being repaired?
There can be times when excessive government spending can slow private-sector expansion by pushing up interest rates and crowding out private investment. However, with interest rates near 60-year lows, this is clearly not one of those times.
If President Obama deserves blame, it is for not making the stimulus larger and having it last longer. The stimulus was only around $300 billion a year at its peak in 2009 and 2010. It had to counteract a loss in annual private sector demand of more than $1 trillion. Put another way, it created 3 million jobs in an economy where we needed 10 million. The 3 million jobs is a step in the right direction, but not nearly enough.
