WASHINGTON – For months, President Barack Obama has been selling his economic stimulus package as a jobs bill that would spare the nation from a frightening spike in unemployment. Asked Monday at his first White House news conference how he would measure the success of the initiative, Obama replied: “My bottom line is, are we creating 4 million jobs?”
But congressional negotiators have since trimmed billions of dollars from the package to satisfy Senate Republicans, diminishing its potential for job creation along with its overall cost. With the House poised to vote as early as today on the measure, analysts are slashing their estimates of its ability to counteract a deepening recession, with several prominent economists now saying the package will save or create fewer than 2.5 million jobs by the end of next year.
At $789 billion, the final package “is just not going to pack the same jobs punch” as some earlier versions, which cost as much as $100 billion more, said Mark Zandi, chief economist of Moody’s Economy.com, whose analyses have been cited by White House officials as well as congressional Democrats. Zandi estimates the measure will create only about 2.2 million jobs by the end of 2010, leaving unemployment hovering around 10 percent and probably forcing lawmakers to undertake another stimulus plan.
The White House has officially pared its own projection to 3.5 million jobs in recognition of the bill’s smaller size. But Christina Romer, who leads Obama’s Council of Economic Advisers, said the administration remains convinced that the package of tax cuts and spending initiatives has sufficient power to boost the sagging economy toward recovery by year’s end.
“Everybody says this is going to create a lot of jobs. We feel strongly that it’s going to be in the 3 to 4 million range,” Romer said in an interview. “In my mind, the worst that can happen is the jobs aren’t created as fast as we wanted.”
But predicting the economic impact of government actions is inherently tricky, Romer said. “We’ll certainly be watching this. And I very much hope we’re right.”
Even at $789 billion, the stimulus package marks an unprecedented attempt by the federal government to jolt a stagnant economy. The overall price tag exceeds 5 percent of the nation’s total annual economic output, far more than the 1 to 2 percent of gross domestic product that president Franklin D. Roosevelt spent trying to lift the nation out of the Great Depression. Because stimulus of this magnitude has rarely been tried, it’s more difficult to predict its effects, some economists said.
Further clouding the crystal ball: Rapidly deteriorating economic conditions have outpaced anyone’s ability to accurately chart the course of this recession. Meanwhile, chaos in the financial system threatens to further destabilize the economy and wreak havoc with economic models.
Most analyses of the stimulus package have come with broad disclaimers. “The macroeconomic impacts of any economic stimulus program are very uncertain,” Douglas Elmendorf, director of the nonpartisan Congressional Budget Office, wrote in a recent memo to lawmakers. “Some economists remain skeptical that there would be any significant effects, while others expect very large ones.”
Asked to predict how many jobs an earlier, $887 billion draft of the measure would create, Elmendorf offered lawmakers a range that “encompasses a majority of economists’ views.” At the high end, he wrote, the measure could be expected to create 3.9 million jobs. But at the low end, the bill might create only about 1.3 million jobs by the end of 2010.
Many analysts had been more optimistic about the House version of the stimulus bill. At $820 billion, it was not much bigger than the final package agreed to Wednesday by a House-Senate conference committee. But the House version contained about $50 billion more in direct government spending – such as payments to state governments and cash for school construction – which economists say is spent quickly and ripples broadly through the economy. The final package, by contrast, is weighted more heavily toward tax cuts, which have a less powerful effect, according to many economists, because taxpayers tend to save a portion of the money.
Most of those changes originated in the Senate, where Democrats needed the votes of three moderate Republicans to clear a procedural hurdle. Among the biggest changes: The addition of a $70 billion provision to protect millions of taxpayers from the alternative minimum tax, a measure Congress was universally expected to approve anyway.
Because the AMT fix was built into many economic models, its presence in the package amounts to “phantom stimulus,” said Nigel Gault, chief U.S. economist at Global Insight, a private forecasting firm. In part because of the AMT provision, Gault said his models show the $838 billion Senate bill would only have created about 2.5 million jobs. Because the final package is even smaller, he said, “our number would come down a little bit.”
Another prominent forecasting firm, St.Louis-based Macroeconomic Advisers, this week cut its estimate for the House bill to 2.3 million from 3.3 million jobs after the CBO reported that only about two-thirds of the money could be spent by the end of next year.
Romer ticked off reasons the independent analysts may be more pessimistic than she is: The White House assumes the money can be spent more quickly than the CBO predicts. Romer assumes that people will treat the tax credit, worth $400 for individuals and $800 for families, as a permanent tax, which means they are more likely to spend rather than save it. And she assumes that the AMT fix prompts a modest increase in economic activity.
But the gap in expectations is encouraging a vocal group of stimulus skeptics, who dismiss all the job projections as economic smoke and mirrors. They point out what many economists readily acknowledge: No one will ever know whether the stimulus package creates jobs, much less how many, because there’s no way to measure what would have happened without it.
“A year from now, you won’t know what the effect of this thing was,” said Harvard economist Robert Barro, who thinks it will do little more than jack up the national debt. “Either things will be really bad, and the proponents will say it would have been worse without it. Or things will rebound and they’ll say it’s because of this program.”