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Did the Obama Stimulus Work?

Thursday, 23 August 2012 09:30 By Robert Pollin, The Real News Network | Video

Paul Jay, Senior Editor, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

We're continuing our discussion about Bob Pollin 's new book, Back to Full Employment. And now joining us again from Amherst, Massachusetts, is Bob Pollin , where he is the cofounder and codirector of the PERI institute. Thanks for joining us, Bob.

Robert Pollin , Codirector, Political Economy Research Institure: Thank you very much, Paul, for having me.

Jay: So, once again, watch the other parts of the interview, 'cause you really should get the unfolding of the logic here. But we're just going to pick up from where we left off. So we're talking now about what are solutions, especially to the pressures of globalization. And in the last segment we talked how significant it is that employers in the United States and Canada, and Europe to a large extent, can threaten workers with these pools of cheap labor and millions and millions of unemployed people all over the world, but many of whom can now produce at a very advanced level. And that pressure has led to stagnation of wages in the United States and Canada, and Europe, I believe, and in spite of higher productivity. And now we're going to talk about, well, then, what do you do about this. This is quite objective, this ability of capitalists to do this. We discounted in the last part the effectiveness of trade protectionism and lowering U.S. currency rates. And now we're going to talk about, well, then, what can we do. And then you get to, well, first of all, stimulate the U.S. economy. And the big attempt at doing that was President Obama's stimulus program. So, Bob, take us through that program, because the critique is it didn't really work.

Pollin : The 2009 Obama administration stimulus program, the so-called American Recovery and Reinvestment Act, was an $800 billion government program over two years to inject spending into the economy. There are lots of debates as to whether the program was too big, too small. The point is that in absolute dollars it was huge. It was bigger than any stimulus program we've had, certainly since World War II, in absolute dollars.

That doesn't mean it was big enough, because the magnitude of the crisis was also massive, also unprecedented. So if you measure this $800 billion, $400 billion over two years, relative to the magnitude of the crisis, it turns out that it wasn't big enough. It did accomplish things. It did counteract the decline of the private economy due to the Wall Street collapse. But it was not enough to revive the economy back onto a path even close to full employment.

Let me just give two examples as to why that was true. One of the factors in the collapse, the Wall Street collapse, was the decline of household wealth. So you actually had household wealth between 2008 and 2009 decline by about $17 trillion—$17 trillion. That's more than 10 percent of U.S. GDP. So it was about—$70 trillion was the total level of household wealth before the crisis, and then after the crisis it's down to $53 trillion. Now, when people experience that much decline in their wealth, the decline in the value of their homes, largely, the value of their other assets, whatever stocks, bonds, pension funds they're holding, then they spend less.

And if we follow some of the economic research on this, what we would expect with that level of a collapse is that you would reduce household spending by about $500 billion right there. So more than half of the money that the stimulus is kind of injecting into the economy is getting withdrawn at the same time due to the collapse of household wealth. So that's one reason why the stimulus was too small.

Another was: while the federal government was injecting this $800 billion over two years into the economy, state and local governments were facing a huge collapse of their finances. So the money was—some money was going to state and local governments to keep them propped up in terms of their spending, but that was only partially compensating for the loss of funds that the states had. For example, our own institution here, UMass Amherst, I was on the budget committee of UMass Amherst, and we faced a huge crisis and the prospects of major layoffs. We got a stimulus check of $50 million. That meant that we could stop the layoffs, but it didn't mean we could add more jobs. So the stimulus program again was just covering in part the hole that was created by the state and local government financial crisis there.

So for those reasons and a few others similar to that, the stimulus was not enough to compensate for this massive Wall Street collapse.

Jay: So I think then some people would argue or ask the question: then why wasn't it made bigger? And some people have argued, actually, if you actually take the size of what was getting out of the economy, it should have been at least even double in size. But is perhaps one of the reasons it wasn't bigger is because if you take out this Keynesian toolkit, the banking and business elite, they understand at times when the economy's about to melt down you can take out some of these Keynesian tools, you can have a certain amount of stimulus, but they don't want enough to actually do what you're hoping it would do, which would actually significantly change employment rates, because that would shift sort of a balance of power back to workers, they would start to gain some leverage, wages would start to go up, so, you know, those who now have, you know, control of public policy at the federal level and state level, majority, they'll only do this stimulus just enough to stop a meltdown, and then they go right back to, okay, relatively high unemployment ain't so bad for us?

Pollin : I think you may be giving them a little too much credit in terms of their ability to know how big the stimulus should have been. I don't doubt your overall perspective. I don't doubt that there are a lot of people, politicians, certainly virtually all Republicans and a high portion of Democrats, that do not want a high-pressure, high-employment economy through which workers have growing bargaining power. I don't disagree with you on that at all.

On the issue of how big the stimulus needed to be at the moment, it was actually hard to know it. And I confess I myself underestimated the magnitude of how big the stimulus should be. I mean, I wrote an article in The Nation right after Obama got elected, and I sketched out a level for the stimulus which wasn't all that different than the one that got enacted, and I didn't have the motives that you are—.

Jay: Yeah, Bob, I understand that, but within the first two years of the administration, when the Democrats still controlled both houses, a year, a year and a half in, one then could have said, okay, it wasn't big enough, there should be another one, and you and a lot of others were saying that, but we sure didn't get that.

Pollin : Sure. The other part of the story, which is also in my book, is the other side, which is monetary policy, the role of the Federal Reserve in mobilizing the credit system. And here we also have this massive blockade, which you and I have talked about many times but deserves to be talked about—especially, the Fed is meeting just today to talk about some new policy measures they might pursue. The point is that monetary policy looks like it's highly, highly, highly stimulative, 'cause they've dropped the interest rate that banks have to pay to get money, to get liquidity down to zero percent. They get money for free. But that is not working in terms of stimulating activity in the economy, because the banks take the money and are sitting on it and are hoarding it. So they're now sitting on $1.6 trillion—again, 10 percent of GDP. So the idea that we have a stimulative monetary policy is not true inasmuch as the money is not getting out into the economy.

Jay: And just—we've talked about this before, but let's do this again, too. And it's not that they're just sitting on it, too. They're also making money out of it (they're just not loaning it into the productive economy) in terms of carry trades, where they, you know, pick up money on foreign currency exchanges, or even still derivatives plays.

Pollin : Well, yes, they're doing all of those things, Paul. But I'm even talking about an even simpler thing. They're holding this money in cash accounts at the Fed, $1.6 trillion. They're also doing the things that—the other things that you're talking about, speculating in derivatives, in carry trade. They are doing those things. The only thing they're not doing is lending money to small businesses to get them going, so that if we don't have a government stimulus, a public-sector spending stimulus to, for example, keep public schools growing, to hire teachers, to hire bus drivers, to hire cafeteria workers, for example, to hire firefighters, if we don't have that coming and at the same time we don't have money coming through the private credit system to the small businesses, that's why the economy's stuck.

Jay: And does there not also be, if there's going to be this kind of stimulus instrument used, that it's targeted and it's big enough to really have an effect on workers' ability to demand higher wages? Otherwise, don't you just have a period of time where the stimulus has an effect and then it starts to peter out, but you're right back to the same situation, which is there isn't enough real demand in the economy and you're back into paralysis again?

Pollin : That is exactly why I try to stress so much full employment as the goal and also say full employment is not just about a statistic with the number of people who have jobs. Pushing the unemployment rate down, say, in the range of below 4 percent, will empower workers. And, yes, capitalists will resist it. But it will also bring demand into the economy, and that, businesses are going to find, is going to be good. They're going to find that people have more money to spend. And that will allow them to invest more and expand their businesses. And that's exactly why the small businesses in particular would benefit tremendously by a successful stimulus program.

Jay: And, again, that's if you had a political regime, a government that actually had as an objective full employment, 'cause right now these guys are actually quite happy selling into the emerging markets and actually don't seem that concerned—these guys being the business elite—don't seem to be that concerned that the American market isn't as robust as it could be, 'cause they can make their money through cheap wages in the U.S. and also just the global market.

Pollin : Well, except the global market isn't doing very well either. I mean, Europe is a basket case. Europe is worse than the U.S. So at a certain point we have to have some serious interest in stimulus. I mean, we do have—if you read The Financial Times, The New York Times, The Wall Street Journal today, you have a lot of talk about the meetings that are going on at the Federal Reserve and the European Central Bank, and these elite newspaper outlets are encouraging a stimulus through the central banks, except nobody talks about what the stimulus actually is, what the techniques are, how to do it, how to do it effectively. And so they're stymied, and that in all probability this round of central bank meetings aren't going to be any more successful than all the previous ones.

Jay: Right. And as I pointed out when I did my commentary on the G20 documents in Toronto, there's a five-letter word that never gets talked about in any of these meetings, and that is wages. And the idea that wages need to go up as part of a solution you don't hear within the business pages, unless they're talking about China. Then all of a sudden, yeah, the wages should go up.

Pollin : That's true.

Jay: Okay. Well, in the next part of our series of interviews with Bob Pollin we're going to kind of wrap up what should be done and talk a little bit more about the politics of all this. So please join us for our summation segment of Bob's new book Back to Full Employment on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

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Did the Obama Stimulus Work?

Thursday, 23 August 2012 09:30 By Robert Pollin, The Real News Network | Video

Paul Jay, Senior Editor, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.

We're continuing our discussion about Bob Pollin 's new book, Back to Full Employment. And now joining us again from Amherst, Massachusetts, is Bob Pollin , where he is the cofounder and codirector of the PERI institute. Thanks for joining us, Bob.

Robert Pollin , Codirector, Political Economy Research Institure: Thank you very much, Paul, for having me.

Jay: So, once again, watch the other parts of the interview, 'cause you really should get the unfolding of the logic here. But we're just going to pick up from where we left off. So we're talking now about what are solutions, especially to the pressures of globalization. And in the last segment we talked how significant it is that employers in the United States and Canada, and Europe to a large extent, can threaten workers with these pools of cheap labor and millions and millions of unemployed people all over the world, but many of whom can now produce at a very advanced level. And that pressure has led to stagnation of wages in the United States and Canada, and Europe, I believe, and in spite of higher productivity. And now we're going to talk about, well, then, what do you do about this. This is quite objective, this ability of capitalists to do this. We discounted in the last part the effectiveness of trade protectionism and lowering U.S. currency rates. And now we're going to talk about, well, then, what can we do. And then you get to, well, first of all, stimulate the U.S. economy. And the big attempt at doing that was President Obama's stimulus program. So, Bob, take us through that program, because the critique is it didn't really work.

Pollin : The 2009 Obama administration stimulus program, the so-called American Recovery and Reinvestment Act, was an $800 billion government program over two years to inject spending into the economy. There are lots of debates as to whether the program was too big, too small. The point is that in absolute dollars it was huge. It was bigger than any stimulus program we've had, certainly since World War II, in absolute dollars.

That doesn't mean it was big enough, because the magnitude of the crisis was also massive, also unprecedented. So if you measure this $800 billion, $400 billion over two years, relative to the magnitude of the crisis, it turns out that it wasn't big enough. It did accomplish things. It did counteract the decline of the private economy due to the Wall Street collapse. But it was not enough to revive the economy back onto a path even close to full employment.

Let me just give two examples as to why that was true. One of the factors in the collapse, the Wall Street collapse, was the decline of household wealth. So you actually had household wealth between 2008 and 2009 decline by about $17 trillion—$17 trillion. That's more than 10 percent of U.S. GDP. So it was about—$70 trillion was the total level of household wealth before the crisis, and then after the crisis it's down to $53 trillion. Now, when people experience that much decline in their wealth, the decline in the value of their homes, largely, the value of their other assets, whatever stocks, bonds, pension funds they're holding, then they spend less.

And if we follow some of the economic research on this, what we would expect with that level of a collapse is that you would reduce household spending by about $500 billion right there. So more than half of the money that the stimulus is kind of injecting into the economy is getting withdrawn at the same time due to the collapse of household wealth. So that's one reason why the stimulus was too small.

Another was: while the federal government was injecting this $800 billion over two years into the economy, state and local governments were facing a huge collapse of their finances. So the money was—some money was going to state and local governments to keep them propped up in terms of their spending, but that was only partially compensating for the loss of funds that the states had. For example, our own institution here, UMass Amherst, I was on the budget committee of UMass Amherst, and we faced a huge crisis and the prospects of major layoffs. We got a stimulus check of $50 million. That meant that we could stop the layoffs, but it didn't mean we could add more jobs. So the stimulus program again was just covering in part the hole that was created by the state and local government financial crisis there.

So for those reasons and a few others similar to that, the stimulus was not enough to compensate for this massive Wall Street collapse.

Jay: So I think then some people would argue or ask the question: then why wasn't it made bigger? And some people have argued, actually, if you actually take the size of what was getting out of the economy, it should have been at least even double in size. But is perhaps one of the reasons it wasn't bigger is because if you take out this Keynesian toolkit, the banking and business elite, they understand at times when the economy's about to melt down you can take out some of these Keynesian tools, you can have a certain amount of stimulus, but they don't want enough to actually do what you're hoping it would do, which would actually significantly change employment rates, because that would shift sort of a balance of power back to workers, they would start to gain some leverage, wages would start to go up, so, you know, those who now have, you know, control of public policy at the federal level and state level, majority, they'll only do this stimulus just enough to stop a meltdown, and then they go right back to, okay, relatively high unemployment ain't so bad for us?

Pollin : I think you may be giving them a little too much credit in terms of their ability to know how big the stimulus should have been. I don't doubt your overall perspective. I don't doubt that there are a lot of people, politicians, certainly virtually all Republicans and a high portion of Democrats, that do not want a high-pressure, high-employment economy through which workers have growing bargaining power. I don't disagree with you on that at all.

On the issue of how big the stimulus needed to be at the moment, it was actually hard to know it. And I confess I myself underestimated the magnitude of how big the stimulus should be. I mean, I wrote an article in The Nation right after Obama got elected, and I sketched out a level for the stimulus which wasn't all that different than the one that got enacted, and I didn't have the motives that you are—.

Jay: Yeah, Bob, I understand that, but within the first two years of the administration, when the Democrats still controlled both houses, a year, a year and a half in, one then could have said, okay, it wasn't big enough, there should be another one, and you and a lot of others were saying that, but we sure didn't get that.

Pollin : Sure. The other part of the story, which is also in my book, is the other side, which is monetary policy, the role of the Federal Reserve in mobilizing the credit system. And here we also have this massive blockade, which you and I have talked about many times but deserves to be talked about—especially, the Fed is meeting just today to talk about some new policy measures they might pursue. The point is that monetary policy looks like it's highly, highly, highly stimulative, 'cause they've dropped the interest rate that banks have to pay to get money, to get liquidity down to zero percent. They get money for free. But that is not working in terms of stimulating activity in the economy, because the banks take the money and are sitting on it and are hoarding it. So they're now sitting on $1.6 trillion—again, 10 percent of GDP. So the idea that we have a stimulative monetary policy is not true inasmuch as the money is not getting out into the economy.

Jay: And just—we've talked about this before, but let's do this again, too. And it's not that they're just sitting on it, too. They're also making money out of it (they're just not loaning it into the productive economy) in terms of carry trades, where they, you know, pick up money on foreign currency exchanges, or even still derivatives plays.

Pollin : Well, yes, they're doing all of those things, Paul. But I'm even talking about an even simpler thing. They're holding this money in cash accounts at the Fed, $1.6 trillion. They're also doing the things that—the other things that you're talking about, speculating in derivatives, in carry trade. They are doing those things. The only thing they're not doing is lending money to small businesses to get them going, so that if we don't have a government stimulus, a public-sector spending stimulus to, for example, keep public schools growing, to hire teachers, to hire bus drivers, to hire cafeteria workers, for example, to hire firefighters, if we don't have that coming and at the same time we don't have money coming through the private credit system to the small businesses, that's why the economy's stuck.

Jay: And does there not also be, if there's going to be this kind of stimulus instrument used, that it's targeted and it's big enough to really have an effect on workers' ability to demand higher wages? Otherwise, don't you just have a period of time where the stimulus has an effect and then it starts to peter out, but you're right back to the same situation, which is there isn't enough real demand in the economy and you're back into paralysis again?

Pollin : That is exactly why I try to stress so much full employment as the goal and also say full employment is not just about a statistic with the number of people who have jobs. Pushing the unemployment rate down, say, in the range of below 4 percent, will empower workers. And, yes, capitalists will resist it. But it will also bring demand into the economy, and that, businesses are going to find, is going to be good. They're going to find that people have more money to spend. And that will allow them to invest more and expand their businesses. And that's exactly why the small businesses in particular would benefit tremendously by a successful stimulus program.

Jay: And, again, that's if you had a political regime, a government that actually had as an objective full employment, 'cause right now these guys are actually quite happy selling into the emerging markets and actually don't seem that concerned—these guys being the business elite—don't seem to be that concerned that the American market isn't as robust as it could be, 'cause they can make their money through cheap wages in the U.S. and also just the global market.

Pollin : Well, except the global market isn't doing very well either. I mean, Europe is a basket case. Europe is worse than the U.S. So at a certain point we have to have some serious interest in stimulus. I mean, we do have—if you read The Financial Times, The New York Times, The Wall Street Journal today, you have a lot of talk about the meetings that are going on at the Federal Reserve and the European Central Bank, and these elite newspaper outlets are encouraging a stimulus through the central banks, except nobody talks about what the stimulus actually is, what the techniques are, how to do it, how to do it effectively. And so they're stymied, and that in all probability this round of central bank meetings aren't going to be any more successful than all the previous ones.

Jay: Right. And as I pointed out when I did my commentary on the G20 documents in Toronto, there's a five-letter word that never gets talked about in any of these meetings, and that is wages. And the idea that wages need to go up as part of a solution you don't hear within the business pages, unless they're talking about China. Then all of a sudden, yeah, the wages should go up.

Pollin : That's true.

Jay: Okay. Well, in the next part of our series of interviews with Bob Pollin we're going to kind of wrap up what should be done and talk a little bit more about the politics of all this. So please join us for our summation segment of Bob's new book Back to Full Employment on The Real News Network.

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Hide Comments

blog comments powered by Disqus