'Absolutely' the stimulus is working, Romer says
| Washington
Is the stimulus working? Given that economists still argue about the effects of FDR鈥檚 New Deal, it will probably be years before they reach any conclusions about the value of President Obama鈥檚 $787 billion recovery package.
But that hasn鈥檛 stopped administration officials from declaring victory. On Thursday, Christina Romer, chairman of the president鈥檚 Council of Economic Advisers, gave one of the most detailed White House defenses of the stimulus to date.
鈥淎bsolutely鈥� the stimulus is working, said Ms. Romer.
鈥淭丑别 Recovery Act ... is helping to slow the decline, and change the trajectory of the economy,鈥� she added.
What鈥檚 her evidence? One of her main points is that the US has experienced an historically unusual deceleration in the fall of its GDP.
Think of the US economy as a skydiver plummeting to the ground in free-fall. In the fourth quarter of last year, GDP shrank 5.4 percent. In the first quarter of this year, it contracted another 6.4 percent.
Then it pulled the ripcord, in the administration鈥檚 view, via passage of the president鈥檚 stimulus package. With a jolt, the parachute (perhaps composed of billions of dollar bills sewn together) deployed, and the descent slowed.
In the second quarter of this year, GDP shrank only one percent. That sudden change in the economy鈥檚 speed of falling, from 6.4 to one percent, was the largest such swing in GDP numbers in almost a decade, and the second largest in 25 years, Romer told the Economic Club of Washington D.C.
If the bill hadn't passed, the decline in second quarter GDP would have been 3.3 percent, instead of 1 percent, according to her calculations.
Moreover, using baseline economic projections from earlier in the year, the stimulus package has saved or created 485,000 jobs, although unemployment continues to grow, Romer said.
鈥淚n other words, after we administered the medicine, an economy that was in free fall has stabilized substantially, and now looks as though it could begin to recover in the second half of the year,鈥� Romer said.
But here鈥檚 where the skydiver analogy is no longer applicable. Somebody with a parachute usually floats gently to earth. Yet economic recovery will not happen until the economy begins expanding again 鈥� until, in essence, the parachute starts floating back up.
鈥淢ost forecasters are now predicting that GDP growth is likely to turn positive by the end of the year,鈥� Romer noted. But, she added, there is 鈥渟ubstantial uncertainty鈥� to this forecast.
On that point, Romer is undeniably correct. Nobody can be certain where the economy is now headed.
But that does not mean economists aren鈥檛 trying to figure it out. An Aug. 5 Morgan Stanley forecast holds that 鈥渢he deepest and longest post-war recession is now ending.鈥�
Stronger-than-expected vehicle production may drive the economy to a 3 to 4 percent positive growth pace in the third quarter of this year, according to Morgan Stanley.
But continued weakness in the service sector and bad news on employment figures show that any path to recovery will not be smooth, according to a new IHS Global Insight analysis.
These continued signs of frailty 鈥渟hould quell any incipient notions of a rapid break-out in economic activity in the second half of 2009,鈥� according to IHS.
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