Rewriting the History of the Stimulus

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Tuesday, 19 July 2011 07:05

Ezra Klein recounted the record of President Obama's stimulus with the help of two of his top economic advisers at the time, Larry Summers and Christine Romer. Romer commented that she failed to recognize that they would only have one shot at stimulus, therefore they had to get as much as possible in their first package.

While this turned out to be true, a main reason was the way the Obama administration sold the stimulus. They used a set of economic projections that were hugely overly-optimistic. Their baseline had the unemployment rate just reaching 9.0 percent in the absence of stimulus.

The fact that the projections were overly optimistic was already quite evident at the point the stimulus was signed in late February. In addition, both Romer and Summers knew that the package they got was grossly inadequate even for the economic path they had projected.

However rather than trying to lay out a path in which more stimulus was possible, President Obama began touting the "green shoots of recovery" and talking about the need to deal with the deficit. It was President Obama's course, presumably carried through on the advice of his Keynesian advisers, that made any further stimulus impossible.