Debate Club

Stimulus Works, But Only When It Is Big Enough

By + More

President Obama predicted that the stimulus would generate between 2 to 3 million jobs. There are a number of careful studies on the stimulus from Congressional Budget Office, Dartmouth College, and elsewhere that support the administration's projections. However, the problem was that we needed 10 to 12 million jobs.

The story of the stimulus is straightforward. It was a useful policy tool to counteract the effects of the collapse of the housing bubble. However, as many of us said at the time, it was nowhere near large enough.

The bubble had been driving the economy in the years prior to 2007. It led to a huge boom in both residential and nonresidential construction. It also led to a huge boom in consumption as homeowners spent based on $8 trillion in bubble generated housing equity.

[See a slide show of 6 ways to fix the housing market.]

When the bubble burst we lost around $600 billion in annual construction spending. We lost close to $600 billion in annual consumption spending. Furthermore, plunging tax revenues forced cutbacks in state and local spending and/or tax increases in the range of $150-200 billion. This total contraction in annual demand was therefore in the range of $1,350-$1,400 billion.

The stimulus was nowhere near large enough to counteract this plunge in demand. While the official size was close to $800 billion, roughly $100 billion was a technical fix to the tax code that is done every year and had nothing to do with stimulus. Around $100 billion was slated to be spent in 2011 and later years. This left $600 billion, or $300 billion a year, to be spent in 2009 and 2010. That was clearly not going to be sufficient to counteract a loss in annual demand of $1,350-$1,400 billion.

[Check out a roundup of editorial cartoons on the economy.]

President Obama's greatest mistake was in overselling the stimulus. His forecast, based on the situation in December of 2008, was that the unemployment rate would never cross 8 percent if the stimulus passed. However between December and April, when the first stimulus dollars were going out the door, the economy lost 3 million more jobs and the unemployment rate had already risen to 8.9 percent. 

Many of us complained at the time that the stimulus was not large enough for the job. Unfortunately President Obama did not acknowledge this fact. As a result, we are left with a very big hole and millions of people who think the stimulus didn't work, as opposed to just not being large enough.

Dean Baker

About Dean Baker Economist at Center for Economic and Policy Reasearch

economic stimulus

Other Arguments

239 Pts
Government Spending Shrinks the Private Sector

No – Government Spending Shrinks the Private Sector

Veronique de Rugy Senior Research Fellow with the Mercatus Center at George Mason University

91 Pts
Stimulus Can Work, But Not During a Debt Crisis

No – Stimulus Can Work, But Not During a Debt Crisis

Chris Papagianis Former Special Assistant for Domestic Policy to President George W. Bush

-95 Pts
Politics, Not Stimulus, To Blame for Slow Growth

Yes – Politics, Not Stimulus, To Blame for Slow Growth

Tamara Draut Author of "Strapped: Why America's 20- and 30-Somethings Can't Get Ahead"

-99 Pts
Government Spending is Just What Our Economy Needs

Yes – Government Spending is Just What Our Economy Needs

Heather Boushey Economist at Center for American Progress

You Might Also Like

See More