Is economic stimulus working?
Over the weekend I read of the final communiqué put out after the G20 summit in Pittsburgh. Amidst the high sounding intentions, there was this gem:
2. When we last gathered in April, we confronted the greatest challenge to the world economy in our generation.
3. Global output was contracting at pace not seen since the 1930s. Trade was plummeting. Jobs were disappearing rapidly. Our people worried that the world was on the edge of a depression.
4. At that time, our countries agreed to do everything necessary to ensure recovery, to repair our financial systems and to maintain the global flow of capital.
5. It worked.
With many developed economies still struggling with increasing unemployment and contracting GDP, this may seem a bit bold. What would the data say?
In my opinion, Bernanke is right, the US recession is technically over, although unemployment is likely to continue to rise for a while longer. The stock market agrees, with the Dow up 26% in the last three months.
Most Asian countries have already returned to growth, led by China (who had one of the world’s biggest government stimulus programs). Growth in the Euro area is turning positive. Even the UK is starting to show signs of recovery.
The leaders of the G20 nations take the credit:
6. Our forceful response helped stop the dangerous, sharp decline in global activity and stabilize financial markets. Industrial output is now rising in nearly all our economies. International trade is starting to recover. Our financial institutions are raising needed capital, financial markets are showing a willingness to invest and lend, and confidence has improved.
All recessions eventually end, is it a bit presumptuous to say global government stimulus plans helped stop this one? Can they take the credit?
There is no doubt that the global government reaction to this downturn was much more decisive (in terms of both speed and volume) and coordinated than at any time in history. The programs begun by President Bush and continued by President Obama were historically quite amazing. And the US wasn’t alone. Every developed country introduced some kind of fiscal stimulus in late 2008 and early 2009, usually quite dramatic, that included monetary (interest rate reductions), fiscal (tax breaks, handouts), and financial (guaranteeing bank liabilities, assistance to financial institutions) stimulus. They literally pulled out all the stops.
The data seems to suggest that in fact, it has worked. Government stimulus packages probably saved between 7 and 11 million jobs in the G20 countries. In Australia, retail sales jumped in months where government payments were flowing, then reduced again when the payments stopped – pretty strong evidence for the effectiveness of stimulus. Cash for clunkers was a tremendous boost to the auto industry.
Difficult to know how much of the recovery should be allocated to the financial measures, monetary policy, economic stimulus, or the normal course of time. Also difficult to allocate how much credit goes to Bush and how much to Obama.
But it does seem clear that the G20 governments are justified in their gloat. The coordinated governmental response to the downturn seems to quite clearly have made things better – or at least better than they would have been without the intervention.
