

The first development, bank stabilization, began in late autumn of last year. The source of the recession was financial-sector turmoil that commenced in August 2007 and peaked in early autumn 2008. Although we did not know it at the time, by the end of 2008 the financial crisis had passed. Financial markets were far from normal, but the panics and major collapses that characterized September 2008 were behind us, and no others arose. This financial-sector stabilization created the environment that is allowing our economy to heal.

This past January, at the end of my term as chairman of the President's Council of Economic Advisers, my agency released the White House economic forecast. At that time, I said that I foresaw a couple of bad quarters but expected that the second half of 2009 would be positive, with perhaps very strong growth in 2010. These forecasts assumed no stimulus; the projected turnaround was instead based on the natural rebound of the economy that would come after the financial crisis had eased. The resumption of GDP growth, which is the second development on the road to full recovery, probably began in late spring of this year.

The third recovery factor—job growth—will be slower to develop. In a shallower recession that ended in late 2001, job growth did not become positive until 2003. Historically, recoveries have a consistent pattern: Productivity grows first, then jobs are created, and finally wages rise.

A crucial question at this point is, "How important were government programs in bringing about positive economic growth?" There is good evidence that a portion of third-quarter growth can be attributed specifically to the cash-for-clunkers program. The disproportionate increase in purchases of motor vehicles relative to other consumption components is evidence that the program altered expenditures.

It is less likely that the housing program, which consisted primarily of a first-time home buyer tax credit, was responsible for much of the turnaround in housing investment that occurred during the third quarter. Housing investment depends on longer-term demand shifts. The program's limited duration would be expected to reduce existing inventories more than it would be expected to stimulate additional building and investment.

Direct government expenditures also increased during the third quarter, but most of this was in defense spending, which was not a primary target of the stimulus programs.

Third-quarter growth was 4.2 percentage points higher than second-quarter growth, which was negative 0.7%. My estimate is that less than half of this growth can be attributed to government programs. Of course, cash for clunkers has ended, and the sharp decline in auto sales in September means that there will be some payback this quarter for third-quarter growth, but proponents of the program argue that the shift in timing was a decent trade-off.




Another subtle but important point: During the cash-for-clunkers program, sales of small cars like Honda Civics went up while sales of large SUVs like the Ford Expedition went down. To discern the net effect of the program on auto sales, it is necessary to take into account not only the addition to sales of subsidized models but also the reduction in sales of discouraged models. Reporting the positives without the negatives would be misleading and would complicate attempts to objectively evaluate the success of the program.

Yet this type of gains-only reporting is precisely what the government is doing with respect to the figures on stimulus-induced new hires. When the government reports this figure, it wants us to believe that the new hires came from the pool of the unemployed and that they are net additions to the stock of employed workers. But the data do not speak to the number of workers who left their current jobs to fill government-sponsored jobs.

If the vacancies that are created as these workers move from their old firms to government-sponsored projects go unfilled, then these job-to-job transitions are negatives that must be subtracted from the positives. And in an economy that is growing on the basis of productivity improvements rather than more workers employed, firms may wait to fill vacated jobs.

Because these data do not tell us where the workers come from and what happens to the slots they leave, the numbers cannot answer the ultimate question: How many net jobs were created? A similar point holds for those who are reported as retained, only in this case the issue is that some of those retained would have moved to different jobs rather than to the pool of unemployed had they been let go. The government is reporting the gross positive figures, not the relevant net figures.

Each month, the Department of Labor reports hires and layoffs from the Job Openings and Labor Turnover Survey (Jolts). The Jolts data revealed that in August 2009 more than four million workers were hired. But, unlike the administration's new jobs-created-or-saved data, the Jolts data also tell us that in the same month about 4.3 million workers lost their jobs.

As a result, the labor market lost over a couple hundred thousand jobs. It would be misleading to examine only the hires without also looking at job losses when evaluating the conditions of the labor market, but that is exactly what the stimulus job accounting does.

