How to Measure Whether an Economic Stimulus Is Working

It is difficult to determine whether an economic stimulus is “working” because there are a variety of factors that can impact the economy. Nonetheless, one can measure whether an economic stimulus is working if the standard is whether the stimulus has, on balance, stimulated the economy, which is to say, whether it has benefited the economy. Whether a stimulus is responsible for averting a recession is a standard that might be too high to meet depending on the circumstances, even if it is the intent of the policymakers who implement it.

A comparison between the two most recent economic stimuli is helpful. President George W. Bush’s 2008 economic stimulus primarily featured $150 billion in tax credits. The Bush stimulus improved the Gross Domestic Product (GDP) for one quarter of a year, but not enough to avoid the subsequent recession. Therefore, many critics argue that the stimulus did not work, but at best only delayed the recession. Indeed, it did not work if the standard of measure was whether it avoided a recession. However, Bush’s stimulus did work if the standard of measure was whether it benefited the economy. Bush’s stimulus might have averted a recession, or at least made it milder and briefer, but for the subsequent financial crisis.

President Barak Obama’s $787 billion economic “stimulus” includes a continuation of Bush's middle tax cuts, which, although they stimulate economic growth (as measured by the GDP), do not meet the definition of a stimulus, which is government spending intended to stimulate economic growth. Most of Obama's stimulus features spending. His spending might be having some positive impact on GDP, which is contracting less than it had been, but not enough to stimulate economic recovery on its own, or at least be more responsible than other factors that might be contributing to recovery.

Indeed, as in the United States, there have been some recent signs of recovery in Europe, even though Obama had dismissed the Europeans' economic stimuli as “too small,” which suggests that other factors are responsible for the recovery. Another possibility the European example suggests is that Obama's judgment about the size necessary for an effective economic stimulus is poor. For if Obama’s stimulus is already “working” with only a few percentage points worth of his $787 billion spending spree being spent this year, then the rest of it would not be necessary as an economic “stimulus.”

There are at least four other factors that are contributing to the recent evidence of the possible beginnings of economic recovery: 1) Actions by the Federal Reserve, 2) federal bailouts, 3) lower energy prices and 4) the natural business cycle.

1) Actions by the Federal Reserve. The Fed has lowered interest rates over the last few years in order to reduce inflation. It has also provided aid to banks and other financial institutions. All of these actions have helped to make credit more available for consumers and businesses.

2) Federal bailouts. Since 2008, the extraordinary federal loans to various financial institutions in particular, as well as partial federal takeovers, have also helped to thaw the nearly-frozen credit market, thus averting the collapse of the global financial system, which would have triggered a depression.

3) Lower energy prices. The price of oil is less than half of what it was a year ago, which has reduced inflationary pressure, thereby eliminating the threat of staglation (the combination of stagnation and inflation.

4) The natural business cycle. Just as the boom led to bust (i.e. the higher energy prices that caused inflation that, in turn caused an increase in interest rates which, in turn, triggered the near-collapse of the financial system) the bust will lead to boom. For example, as the value of homes decreased, the price became more affordable for lower income people to buy. Therefore, sales of homes are increasing, which is one of the leading indicators of economic growth.

An economic stimulus can stimulate the economy in the short term, at the long-term expense of increased government spending, which acts as a drag on the economy when the bill for the spending must be paid. In conclusion, economic stimuli do benefit the economy as measured by the Gross Domestic Product, even if they fall short of averting recessions, absent other factors impacting the economy.

Obama’s economic “stimulus,” however, is so large that its short-term benefit is more heavily outweighed than Bush's by the long-term cost, primarily because much of his $787 billion spending spree is not economically stimulative and is spread out over several years. Moreover, although Obama's spending, like Bush’s economic stimulus, may be having some benefit to the GDP, the recent signs of economic recovery are more likely attributable to other factors for which neither Obama nor his stimulus are responsible. In short, both Bush’s and Obama’s economic stimuli should be judged by the same measure: Judging them fairly, because they have both been beneficial to the economy, both stimuli can be said to have “worked,” at least in the short-term. However, judging the economic stimuli by the less reasonable higher standard of whether they stimulated the economy sufficiently in order to maintain or return to prosperity, they have not worked.