How To Gauge Whether The Stimulus Is Working President Obama has said job creation will be the ultimate measure of whether his $800 billion-plus stimulus package, nearing approval on Capitol Hill, is working. But just raising the question of benchmarks opens the door to a contentious debate.

How To Gauge Whether The Stimulus Is Working

During a town hall-style meeting Tuesday in Fort Myers, Fla., to sell his stimulus package, President Obama said that he expects "to be judged by results." Joe Raedle/Getty Images hide caption

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Joe Raedle/Getty Images

During a town hall-style meeting Tuesday in Fort Myers, Fla., to sell his stimulus package, President Obama said that he expects "to be judged by results."

Joe Raedle/Getty Images
Graphic: CBO Says Stimulus To Add Jobs, Growth

The pending stimulus bill is forecast to add 1.2 percent to 3.6 percent to economic growth. Read The Story

How and when can taxpayers, who will ultimately foot the hefty bill, measure the success of President Obama's $800 billion-plus stimulus package?

In unequivocal terms, the president has offered his own benchmark of success for his historic legislative gamble, now nearing approval on Capitol Hill.

"My initial measure of success is creating or saving 4 million jobs," Obama said during his prime-time news conference Monday.

"That's bottom line No. 1," he said. "Because if people are working, they've got enough confidence to make purchases, to make investments."

The president has set his standard. But it's not universally accepted. Ask a half-dozen economics experts how to gauge stimulus success and you'll most likely get a half-dozen answers.

Just raising the question of stimulus benchmarks opens the door to a debate as contentious as the one raging on Capitol Hill.

Whose Yardstick Is It, Anyway?

On one side is an emerging GOP argument: FDR's New Deal — designed to help lift the country out of the Great Depression of the 1930s — "did not work" in the long run, as Senate Minority Leader Mitch McConnell said Monday. And so, McConnell argued, it follows that Obama's new New Deal will also fail.

Administration officials have said that during the current crisis, the American people are unlikely to buy McConnell's "revisionist" argument against government intervention.

Brian Reidl of the conservative Heritage Foundation is no fan of the stimulus plan. He believes it will be impossible to distinguish what the legislation may do for the economy from what the economy would have fixed on its own.

"There is no single variable to measure if it works — and for the simple reason that you cannot distinguish what resulted from the stimulus and what would have happened to the economy without a stimulus," Reidl said. "But the goal seems to be creating jobs, so that will be the most relevant figure."

And the easiest to measure.

The Big Measure: Unemployment

Obama has said his stimulus plan would create millions of jobs at a time when the nation's unemployment rate has been on a frightening upward trajectory.

In the last month of 2008, unemployment rose in 98 percent of the nation's metropolitan areas; it climbed above 10 percent in 40 of them, including Detroit, where economic hopes are also pinned on a government bailout of the auto industry.

This year, in January alone, 598,000 jobs were lost.

"The stimulus is supposed to be designed to stabilize employment," said Richard Sylla of New York University's Leonard N. Stern School of Business.

Projected Jolt For The Economy

If Obama signs the stimulus legislation this month and a raft of so-called shovel-ready infrastructure projects get fast-tracked as planned, Sylla predicted that by midsummer, the nation's workers should start to feel some effects of the package.

"We can measure job creation then, and we can also measure new claims for unemployment benefits to see if the plan is doing what it's supposed to do — stabilize employment," he said.

Obama has said the stimulus could create up to 4 million jobs. That means he has been looking at the most optimistic numbers from the nonpartisan Congressional Budget Office. This month, the CBO released an analysis of the stimulus bill as approved by the House. The Senate passed its own version Tuesday. Because the two plans are substantively the same, CBO officials say their earlier analysis still holds. The two chambers will reconcile their versions before voting on a final bill in coming days.

According to Douglas Elmendorf, the CBO's director, the stimulus plan would, by the fourth quarter of 2010, increase employment by 1.3 million to 3.9 million jobs. Without the stimulus, the analysis projects, the jobless rate would be 8.7 percent in that same quarter. With the stimulus, unemployment would be lower by anywhere from 0.7 percentage points to 2.1 percentage points, according to the CBO.

Short-Term Boost?

But this boost to the economy might be short-lived, CBO warns. "The effects of the legislation would diminish rapidly after 2010," Elmendorf said in a report sent to leaders of the House and Senate budget committees.

And there lies the rub for economists like Tyler Cowen of George Mason University.

"We need to look two or three years down the road" to measure the stimulus plan's success, says Cowen.

He predicted that the nation's gross domestic product — the value of goods and services produced by the country — will be up a year from now, because the government will be pumping money into the economy at an unprecedented rate.

"But will that generate a second round of activity that will drag the economy out of the current mess?" he said. "Personally, I don't think it will."

Should Banking Have Been Job 1?

Tyler is among a cadre of economists who argue that the administration should have moved first to stabilize the nation's banking system and its housing market before moving the stimulus plan through Congress.

"Banks need to be working better for any stimulus to work," Tyler says. "I'll be looking at the whole mess of the banking system and how it is getting resolved."

Amity Shlaes, a senior fellow for Economic History at the Council on Foreign Relations, says that the stimulus package will encourage "some growth for the shorter term."

But, like Tyler, her more conservative priorities would have been to tackle banking first, then fix entitlement programs like Social Security and create tax laws that benefit business.

"Hang a sign around the U.S. that says, 'Open for Business,' " she says, "and then decide if you need a stimulus."

But many economists echo Alan Blinder, a Princeton University professor of economics and public affairs.

In a recent essay for The Wall Street Journal titled "My Economic Wish List," Blinder argued for a large stimulus bill that would be spent quickly on shovel-ready projects, on federal grants to forestall state and local government cutbacks, on payroll tax cuts and on expanded benefits for the unemployed.

For Blinder, the plan hinges on fast spending in the first 12 months. "Stimulus is, after all, about shortening recessions," he said.

Great Expectations

Obama has said, and reiterated Monday night, that stabilizing the banks and credit markets, as well as the housing market, also figures prominently in his plan for recovery.

But he has taken his first big gamble on jobs — and those on both sides of the stimulus/no stimulus divide say that, politically, it would have been difficult for him to do it any other way.

So economists will be watching job numbers and unemployment claims in the first year, and larger indicators — from the GDP to home sales — in years beyond.

"The macroeconomic impacts of any economic stimulus program are very uncertain," the CBO's Elmendorf said in his letter to Capitol Hill budget leaders, adding with some understatement: "Economic theories differ in their predictions about the effectiveness of stimulus."

And given the rarity of stimulus packages of this size, the range of expectation is vast.

During a town hall-style meeting Tuesday in Fort Myers, Fla., to sell his stimulus package, Obama said that he expects "to be judged by results."

He can count on it.