ProPublica: Separating Economic Fact from Economic Fiction (particularly about the Stimulus!)

ProPublica has a list of five myths about the Economy, but these two were of particular interest to me:

2. The stimulus failed./The stimulus rescued the economy.

Neither. It clearly hasn't hauled the country back to full employment, but widely-cited economic models show it probably prevented a deeper downturn.

Many economists and nonpartisan forecasting firms have credited the American Recovery and Reinvestment Act with increasing employment by at least two million jobs (see Table 8). Although the unemployment rate remains stuck at 9 percent, several economists estimate that unemployment would have been higher -- as much as 12 percent -- and remained high longer without it.

One of the most prominent studies on the stimulus was put out by the economists Alan Blinder and Mark Zandi in July 2010. The pair concluded that while the bank bailout and actions by the Federal Reserve had a greater impact in ending the recession, the stimulus was a critical part of the remedy. "We do not believe it a coincidence that the turnaround from recession to recovery occurred last summer, just as the ARRA was providing its maximum economic benefit," they wrote.

Other analyses have shown less of an impact -- that aid for state budgets and education "funded staffing that would have occurred anyway" and that the stimulus saved government jobs while doing little to boost private-sector employment.

Critics say it failed because it fell short of what administration officials claimed it would do. They point to a chart produced shortly before Obama's inauguration by his economic advisers Christina Romer and Jared Bernstein, which showed that if the stimulus plan were passed, unemployment wouldn't top 8 percent. But the recession turned out to be much more severe than they and blue-chip economists realized.

The goal of the stimulus "was to end the Great Recession and jumpstart our recovery," said Zandi, who has advised John McCain but has said he's a registered Democrat. "It did that. It was never intended nor should it be expected to be the source of long-term growth. The plan was always to hand the baton to the private sector. And that was going smoothly until we got creamed" by the European debt crisis and rising gas prices.

3. The stimulus should have been bigger.

This is a red herring. Politically, the initial stimulus package almost certainly couldn't have been bigger because the moderate senators who provided the key votes wouldn't stomach a package over $800 billion. Indeed, late in the game, Sen. Susan Collins, R-Maine, and others were looking to trim the bill to $650 billion.

Regardless of the politics, many economists, including New York Times columnist Paul Krugman, insist the stimulus was too weak to deal with the crisis. Other economists, including John F. Cogan and John B. Taylor at Stanford University and the Hoover Institution, argue that the amount of stimulus spending wouldn't have mattered because it mainly reduced borrowing by state and local governments rather than increasing spending. So, they contend, the predicted benefits were washed out.

In any case, the total stimulus is bigger than you might have thought. Since the Recovery Act, Congress has approved hundreds of billions of dollars in additional stimulus, including the renewal of unemployment benefits, this year's payroll tax cut and the extensions of the education jobs fund and the homebuyer tax credit. The total is now well over a trillion dollars.

But even that isn't sufficient knowing what we do now, according to Romer. As she recently told The Washington Post's Ezra Klein, the economy "probably needed about $2 trillion given what we were actually up against."