James Pethokoukis has an updated version of the chart the Obama administration released back in 2009 to help sell the stimulus bill. The original chart came from a January 2009 report about the impact of the stimulus by economists Christina Romer and Jared Bernstein, showing projected unemployment with and without the proposed spending bill. As you can see, the prediction (dark blue line) was that if the stimulus plan was passed, the unemployment rate would top off in mid-2009 at 8 percent, it would drop to 7 percent by the third quarter of 2010 to reach a 5.6 percent level in September 2012. Obviously, when you look at the actual results (red line), that didn’t happen.
There are many running theories about why the plan failed: No one knew how bad the recession was, the stimulus was poorly designed, the stimulus was too small, stimulus spending can’t work, politics gets in the way, and so on.
My position is that stimulus is never the way to go. First, economists don’t agree about whether government spending is capable of jump starting a declining economy, even in the short run. In addition, even if one believes that the stimulus can boost economic growth in the short run, it requires that the fiscal stimulus be “timely, targeted and temporary,” according to Larry Summers. But that’s rarely the case, since there are many factors that get in the way of proper implementation: Spending bills are mostly designed, because of politics or other factors, in ways that prevent them from having anywhere near the promised impacts.
That’s reality. And yet, as I have explained before, over and over again, the same policies that failed in the past find advocates for their implementation once again. The belief that the government can get it right this time is a powerful force — even among those who are willing to admit that government policies have failed in the past.
The main lesson from this chart is that the pretense of knowledge is a powerful thing. Despite what we think, we know much less than we claim we know. Thus, we should take economic predictions (especially when used for political reasons) with a grain of salt.