Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided about whether this spending was worth it, and they are just as divided now.
The president's economists ran the numbers through their model and predicted that the stimulus package would create or save at least 3 million jobs. John F. Cogan and John B. Taylor of Stanford and Tobias Cwik and Volker Wieland of the Goethe- University of Frankfurt argue that the stimulus will create about a half-million jobs.
Edward L. Glaeser of Harvard University compared the change in employment in each state to the amount of stimulus money it has received. He found a slight relationship between stimulus dollars and job creation, but none at all if you set aside three states: Alaska and the Dakotas.
Overall, most economists seem to think the stimulus was a good idea, but there's a general acknowledgment that we know relatively little about the relationship between fiscal policy and job creation. We are left, as Glaeser put it on The New York Times' Economix blog, "wading in ignorance."
But the rest of the world is not divided about what should come next. Voters, business leaders and political leaders do not seem to think that we should do it again, even with today's high unemployment.
That doesn't inspire confidence. Furthermore, they understand something that is hard to quantify: Deficit spending in the middle of a debt crisis has different psychological effects than deficit spending at other times.
In times like these, deficit spending to pump up the economy makes them feel more insecure because they see a political system out of control.
Deficit spending doesn't induce small businesspeople to hire and expand. It scares them because they conclude the growth isn't real and they know big tax increases are on the horizon. It doesn't make political leaders feel better, either. They see their nations careening to fiscal ruin.
So we are exiting a period of fiscal stimulus and entering a period of fiscal consolidation. Last year, the finance ministers of the G-20 were all for pumping up economic activity. This year, they called on their members to reduce debt. In this country, deficits are now the top concern.
Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. Events tell a more complicated story.
Alberto Alesina of Harvard has surveyed the history of debt reduction. He's found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, "in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions."
This was true in Europe and the U.S. in the 1990s, and in many other cases before. In a separate study, Italian economists Francesco Giavazzi and Marco Pagano looked at the way Ireland and Denmark sharply cut debt in the 1980s. Once again, lower deficits led to higher growth.
So the challenge for the United States in the years ahead is to consolidate intelligently. That means reducing deficits while at the same time making the welfare state more efficient, boosting innovation in areas like energy, and spending more money on growth-enhancing sectors like infrastructure.
The biggest task will be to reduce middle- class entitlement spending. Alesina found that spending cuts are a more effective way to stabilize debt than tax increases, though we'll need both.
The second biggest task is to consolidate while addressing another problem: labor market polarization. According to a Hamilton Project-Center for American Progress study by David Autor, high-skill sectors saw no net loss of jobs during the recession.
Middle-skill sectors like sales saw an 8 percent employment decline. Blue-collar jobs fell by 16 percent.
In other words, the recession exacerbated the inequalities we've been seeing for decades. Somehow government has to cut total spending while directing more money to address the trends that threaten to hollow out the middle class.
During the period of consolidation, in other words, the government will have to spend less, but target better. That will require enormous dexterity and intelligence from a political system that has recently shown neither.
THE NEW YORK TIMES