Autoworkers in 2008, facing imminent layoffs. The Bush administration approved rescue funds.
It was the winter of 2009 and the United States economy was shrinking. In the last three months of 2008 the economy had contracted at an annual rate of 8.9 percent, the sharpest decline in more than half a century. It shrank at a 6.9 percent rate the next quarter. By February 2009 the country had lost more than five million jobs.
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We know what President Obama did. In February, he pushed Congress to pass the American Recovery and Reinvestment Act, an $831 billion fiscal stimulus package aimed at creating demand for goods and services to reignite growth and stop the downward spiral.
Only three Republican senators voted for the bill — Susan Collins, Olympia Snowe and Arlen Specter (who as a result of the vote had to change parties). Since then, Republicans have condemned the legislation as an unmitigated disaster. “These policies have made our economic woes worse,” the House speaker, John Boehner, wrote earlier this month on the third anniversary of the bill’s enactment. They “left millions of Americans out of work and made the future of job-crushing debt even more daunting for our children and grandchildren.”
The attack hardly fits an economy that appears finally to be gathering steam. By the end of last year the economy had recovered to its peak size in 2007, before the recession. Employment is growing at a steady, though modest, clip. The jobless rate is 8.3 percent, down from 10 percent at its peak in October 2009.
Perhaps more intriguingly, the Boehner attack suggests a question: Were there other plausible choices? And would they have fixed the economy sooner?”
Around the world, governments were trying to stimulate their economies at the time — on the right as well as on the left, totalitarian autocracies and parliamentary democracies. By early 2009, China had announced stimulus policies amounting to 4.8 percent of its gross domestic product. The austere Germans put in place measures worth about 3.4 percent of their G.D.P. to bolster flagging demand. A study published by the New York Fed found the average fiscal stimulus in a group of some 40 developed and developing countries was slightly less than 3 percent of national output.
There were alternatives. After an initial experiment with government stimulus in 2009, many European countries reversed course and slashed their budgets to try to restore fiscal balance, in the expectation that this would reassure businesses and investors that government finances were under control, and give them the confidence to invest and bolster the economy. But so far, these policies have proved to be an unmitigated disaster.
Britain — which has its own currency and enjoys low interest rates — offers perhaps the best parallel to the United States. In 2010 the coalition government of David Cameron came into office promising to undo the stimulus policies of its predecessor. It cut spending across the board, asking government departments to slash budgets by 25 to 40 percent. And it shot Britain’s incipient economic recovery in the foot.
By the end of last year the British economy was still 4 percent smaller than it was before the recession started four years earlier. And it is expected to contract a little more this year. Even after budget cuts, the government’s debt is bigger, compared with the size of the economy, than when Mr. Cameron took office.
By comparison, despite criticism of its size and composition by both the right and the left, the stimulus by the Obama administration did add to jobs and growth. The nonpartisan Congressional Budget Office estimates it will have contributed at least 1.6 million jobs and perhaps as many as 8.4 million by 2013.
This month, the Booth School of Business at the University of Chicago surveyed a panel of economic experts of different political persuasions about the impact of the president’s stimulus package: eight out of 10 said it had contributed to lower unemployment by the end of 2010. There was less consensus on whether its benefits would exceed its long-term costs, including higher taxes to pay for the spending. Still, when asked if the policy was worth it, four times as many economists agreed as disagreed.
Regarding the children crushed by debt, no plausible economic strategy would have kept the budget deficit from mushrooming. President Obama’s fiscal stimulus package of February 2009 cost the equivalent of about 5 percent of the nation’s yearly output, most of which was spent over four years. Wrapping in other attempts by the Obama administration to ignite demand — from the payroll tax cut and extended unemployment assistance to the “cash for clunkers” program to encourage drivers to buy a fuel-efficient car — the cost rises to some $1.25 trillion, which amounts, on average, to about 2.1 percent of the nation’s annual output from 2009 through 2012.
While this is not cheap, it accounts for a small share of the budget deficit, which topped 10 percent of the country’s G.D.P. in 2009 and remained at 8.7 percent last year, swollen by plummeting tax revenue and mandatory expenditures as the country sank into recession and unemployment surged.
Kenneth Rogoff, a professor of economics at Harvard who has written extensively about financial crises and their aftermath, says he thinks it unlikely that an alternative path would have delivered a much better outcome. Given the heavy debt burden on American families, he says the pattern of low and volatile growth and the growing deficit “would have happened under anyone.”
For sure, Republicans would have calibrated economic stimulus differently — heavier on tax cuts and lighter on government spending. A Republican stimulus in 2009 might have been smaller; more focused on tax cuts and incentives for investment by business with less emphasis on extended unemployment insurance or transfers for struggling states.
These differences are not trivial. Chances are, the package would have delivered less bang for the buck. Most economists say they believe that tax cuts and rebates would have been less likely to generate new sales than direct government spending, because households swamped by debt were likely to save their windfall.
But it is easy to forget that Mr. Obama’s stimulus wasn’t the first. In early 2008 George W. Bush pushed a $170 billion package to prop up an economy already shrinking as the housing bubble deflated. The Bush administration also drafted the first $17.4 billion tranche of the bailout for General Motors and Chrysler, which is now maligned by the campaign of Mitt Romney as “crony capitalism on a grand scale.” Had John McCain rather than Barack Obama followed, chances are he would have opted to continue along that path.
Mr. Rogoff — an accomplished chess player — explains that there is a term in chess called an “only move,” a move forced by circumstance — the only one available to avoid immediate defeat. The Obama administration’s efforts to stimulate the sagging economy, he says, fit that description. It is unlikely that Republicans would have done much differently.
Republicans on the campaign trail are now vowing to undo President Obama’s economic strategy, which they claim has done so much damage to the American economy, and return the country to immediate austerity. Mr. Romney, for instance, promises to reduce federal spending to 20 percent of the nation’s output by 2016, down from about 24 percent today.
But it’s hard to tell whether to believe this embrace of frugality. Responding to a question about the deficit during a campaign speech in Michigan last week, Mr. Romney pointed out: “if all you’re thinking about doing is cutting spending, as you cut spending you’ll slow down the economy, so you have to create at the same time pro-growth tax policies.”
To figure out what his pro-growth policies might consist of, it’s useful to turn to his track record as governor of Massachusetts: in 2005 Mr. Romney proposed a $600 million stimulus package to create 20,000 jobs over five years, at a cost of $30,000 a job. That sounds familiar.
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