The failure of the American Recovery and Reinvestment Act to deliver us from high unemployment will provide research grist for economists for decades to come.  I think it continues to be worth talking about now.  Let’s start with some simple economic theory.

There is a small subspecies of economists who argue that economies seamlessly and instantly move to their appropriate level (equilibrium). To these folks, the unemployment we observe is simply an optimal response by economic agents to markets. At the other extreme are those who foster the belief that government policy plays out with similar effortless ease to bolster demand, stimulate supply or otherwise tweak the economy to its optimal performance. These are entertaining arguments, but in a world more akin to the real one, folks who want jobs lose them, businesses who want customers don’t have them, and governments that try to be efficient aren’t.

In early 2009, the nation desperately needed a measure of confidence that the economy would recover.   A huge stimulus – say $200 billion as I argued – was much needed medicine. We got something far bigger, and it backfired miserably.

The stimulus bill ended up at $856 billion spread out over a little more than two years. Here’s how it worked. In 2008, roughly 137 million Americans worked to create $14.59 billion in goods and services, so each worker produced a tad over $106,000 in goods or services. In the worst case, the stimulus bill should have led to one new job for each $106,000 spent, or roughly 7.9 million additional jobs. Though we cannot yet know how many jobs would have been lost without the stimulus; today, there are about a million more Americans working than when the bill passed. According to the Congressional Budget Office, perhaps 3.7 million jobs could be attributed to the stimulus. If that’s correct, the stimulus kept the unemployment rate from rising to about 12 percent at a cost of $225,000 per job.

Buried in the Federal statistics is the truth that few want to admit. As of last June, only $85 billion in stimulus expenditures had yet been received by states, and only about half of the $288 billion in tax relief has reached consumers. So actual stimulus expenditures have thus far been only about $229 billion – and a lot of that remains unspent as cities bid contracts and plan new spending. The rest remains ensnared in federal red tape.  (The Latin word for this is SNAFU.) 

So, since early 2009, the realities of the bureaucracy and contracting process means we’ve been able to spend only about $200 billion more federal dollars than we would have otherwise. This has had some modest job creation effects that should be recognized and welcomed. But in the process, we’ve burdened ourselves with a monstrous debt that has rocked consumer and investor confidence. Congress chose a gargantuan stimulus instead of a huge one. It has backfired on them miserably, slowing the recovery. We can only hope against evidence that the next congress will do better.