3 June 2009 
I began this blog at the end of March after the stimulus bill had become law. I had been struck by how much the stimulus debate had focused on whether the bill was efficient. (It clearly was not.) There was much less discussion of whether the stimulus would be effective, and of the timing of the macroeconomic boost.
Everyone wants to know when the U.S. economy will start growing. I will focus on a related question: when will the stimulus law begin to have a significant positive effect on U.S. economic growth? And could it have come sooner if the Administration had done something different?
I believe the Administration made an enormous mistake in its legislative implementation of the stimulus. As a result, the boost to GDP will come six to nine months later than it needed to (maybe more). Given the President’s desire to do a large fiscal stimulus, and given his policy preferences, he could have had a different bill that would have been producing significant GDP growth beginning now, rather than in the middle of next year. That’s a huge mistake with real consequences for the U.S. and global economies.
To illustrate this point, let me classify four types of fiscal stimulus:
- a permanent tax cut;
- a temporary tax cut;
- one-time checks to people independent of their tax liabilities; and
- increased government spending through federal and state bureaucracies: infrastructure, energy spending, etc.
There is of course a fifth option: no fiscal stimulus law.
If you’re going to do a fiscal stimulus (big if), the best kind is a permanent tax cut. It is effective, efficient, and fast:
- effective - People spend a large proportion of a permanent tax cut. This is derived from Milton Friedman’s “permanent income hypothesis.”
- efficient - People spend their own money on themselves, so they waste very little of it, and they spend it on things that matter to them. Again, see Milton Friedman.
- fast - Checks are delivered quickly, and people spend most of their own money soon after they get the check.
This was part of the short-term logic behind the 2003 tax cut, which we designed to foster both short-term and long-term economic growth. I also have a strong general policy preference for lower taxes rather than more government spending, but that’s a separable question from how it works as short-term stimulus.
In 2008 we knew we could not get a Democratic Congress to enact a permanent tax cut. Q: Do you then go for a temporary tax cut, or do nothing? The President thought the risks of an economic slowdown in 2008 were significant enough that it made sense to pursue a (second best) temporary tax cut with the Congress.
Like the 2003 law, the 2008 law got the bulk of its short-term GDP boost by advancing tax refunds from the year to come, and delivering them as checks from the IRS to taxpayers. As in 2003, the checks were delivered to taxpayers in the summer (mid-June to early-August), and consumers immediately started spending a portion of their rebates.
Because the 2008 law was a temporary tax cut, taxpayers spent a smaller proportion of it than anyone would have liked. While designing the law, we assumed about 1/3 would be spent, and much of that fairly quickly. The rest would be saved, which is also good but doesn’t help short-term GDP growth. Economists agree that GDP in Q3 and Q4 of 2008 was higher than it otherwise would have been because of the 2008 stimulus law. It was efficient, fast, yet only partially effective, with a smaller GDP boost than we would have liked:
- efficient - People were again spending their own money on themselves. You get very little waste, and people know what they want and need.
- fast - Checks were delivered quickly, and much of the spending that did occur happened in Q3, with some in Q4, and with very little left by Q1 of 2009.
- only partially effective - Because it was a temporary tax cut, people saved a lot of their checks, as we expected. Still we got a GDP bump in Q3 and Q4, and in retrospect we certainly needed it.
The 2008 law was mostly (2) from my list above – a temporary tax cut. Some of the money went to (3), checks to people who didn’t pay income taxes. This was necessary to reach a compromise with a Democratic Congressional leadership that placed a high priority on the distributional effects of the law. Speaker Pelosi insisted that poor people who owed no income taxes still get “rebate” checks, and that high-income taxpayers get nothing. So the 2008 stimulus law was mostly (2) with a little bit of (3).
Now fast forward to January of 2009, when President Obama proposed an enormous fiscal stimulus. The President’s mistake was in largely deferring to Congress on the composition of the stimulus bill. Rather than allowing Congress to pump hundreds of billions of dollars through slow-spending and inefficient bureaucracies, the President should have insisted that Congress instead send all the funds directly to the American people and let them spend it quickly and efficiently. Given his policy preferences, he could have directed a large share of those funds to poor people who don’t pay income taxes. He could have again mislabeled these payments as “tax cuts,” or just correctly labeled them as one-time entitlement payments. I would not have liked that policy, but it would have generated a faster macroeconomic boost than what he allowed Congress to do instead.
Let’s compare the two scenarios. The enacted 2009 stimulus is:
- effective (eventually) – Most of the spending through government bureaucracies will (eventually) increase GDP. Some of the funds transferred to State governments will be used to offset State spending or tax cuts that otherwise would have occurred, so there’s a loss. But clearly the proportion of the $787 B that will eventually increase GDP will be high, and much higher than if all the funds were given to individuals and families.
- inefficient - It will be inefficient in two senses. The spending represents the policy preferences of legislators (and all their ugly legislative deals and compromises), rather than the choices of hundreds of millions of Americans who presumably know better how they would like money spent on them. The spending will also be wasteful, and we are starting to see signs of this in the press.
- s-l-o-o-o-w - CBO says that $25 B of spending had gone into the economy by May 22nd. That’s less than 4% of the total budgetary impact of that bill. Other news reports suggest that about $40 B is in the economy if you include the revenue side. Remember that almost all of the 2008 stimulus was in private hands by August 1. We will get very little GDP boost from fiscal stimulus in Q3 of 2009, and not much in Q4 either. The stimulus will begin to ramp up in Q1 of next year, and be in full swing by Q2 and Q3 of 2010.
Had the President instead insisted that a $787 B stimulus go directly into people’s hands, where “people” includes those who pay income taxes and those who don’t, we would now be seeing a stimulus that would be:
- partially effective but still quite large - Because it would be a temporary change in people’s incomes, only a fraction of the $787 B would be spent. But even 1/4 or 1/3 of $787 B is still a lot of money to dump out the door. The relative ineffectiveness of a temporary income change would be offset by the enormous amount of cash flowing.
- efficient - People would be spending money on themselves. Some of them would be spending other people’s money on themselves, but at least they would be spending on their own needs, rather than on multi-year water projects in the districts of powerful Members of Congress. You would have much less waste.
- fast - The GDP boost would be concentrated in Q3 and Q4 of 2009, tapering off heavily in Q1 of 2010.
Why did the President not do this? Discussions with the Congress began in January before he took office, and he faced a strong Speaker who took control and gave a huge chuck of funding to House Appropriations Chairman Obey (D-WI). I can think of three plausible explanations:
- The President and his team did not realize the analytical point that infrastructure spending has too slow of a GDP effect.
- They were disorganized.
- They did not want a confrontation with their new Congressional allies in their first few days.
I think the Administration now recognizes this problem. Last month when they released a CEA paper “Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009,” the paper danced around the timing of job growth and government outlays in 2009 and 2010. Tips for reporters: (1) ask the Administration to give you OMB estimates of quarterly cash flows for the stimulus law, and (2) ask them to give you the quarterly GDP and job growth estimates behind this CEA paper. I know the first one exists, and I’d bet heavily the second does as well.
Fortunately, CBO Director Doug Elmendorf just gave a presentation titled “Implementation Lags of Fiscal Policy“ to the IMF’s conference on fiscal policy. All of the following data are from his presentation.
The final 2009 stimulus law broke down like this:
|
10-yr total |
% of total |
|
|
Discretionary spending (highways, mass transit, energy efficiency, broadband, education, state aid) |
$308 B |
39% |
|
Entitlements (food stamps, unemployment, Medicaid, refundable tax credits) |
$267 B |
34% |
|
Tax cuts |
$212 B |
27% |
|
Total |
$787 B |
100% |
The problem is that only 11% of the first line (discretionary spending) will be spent by October 1 of this year. In contrast, 31-32% of the entitlement and tax cuts lines will be out the door by that time. (I have questions about the speed of the entitlement part. The bulk of that is Medicaid spending, and it’s not clear to me that a Federal payment to a State means the cash is immediately flowing into the private economy.)
If we extend our window to October 1, 2010, then less than half the discretionary spending will be out the door, while almost 3/4 of the entitlement spending and all of the tax cuts will be out the door and affecting the economy. The largest part of the stimulus law is therefore also the slowest spending part. This is fine if you’re trying to increase GDP growth over the next 2-4 years. If you’re going for short-term GDP growth, it makes no sense.
Director Elmendorf drills down further into discretionary spending and shows that defense spending happens quickly, highways and water extremely slowly:
- If you allocate $1 to defense spending, 65 cents has been spent within one year.
- If you allocate $1 to highway spending, 27 cents has been spent within one year.
- If you allocate $1 to water projects, only 4 cents has been spent within one year.
In fact, the infrastructure spending in the stimulus law will peak in fiscal year 2011, which goes from October 1, 2010 to September 30, 2011. That’s too late from a macro perspective.
The Director further points out that the 2009 stimulus law created many new programs. This slows spend-out, as it takes time to create and ramp up the new programs.
The Administration has made much of working with federal and state bureaucracies to find “shovel-ready” projects to accelerate infrastructure spending. All of my conversations with budget analysts suggest this claim is tremendously overblown, and Director Elmendorf asks, “Is this practical on a large scale?”
The 2009 stimulus law will increase U.S. economic growth. But the actuals are matching the budget analysts’ projections for the speed at which that effect will occur.
I would not have liked a stimulus law that would have given cash to people who didn’t pay income taxes. But from a macroeconomic perspective, we need the faster economic growth now. Had the President and his team insisted on giving money to people (taxpayers or not) rather than to bureaucracies, we would be seeing a huge growth spurt in Q3 and Q4 of this year.
It is sad that instead we have to wait until the middle of next year because the White House deferred to Congressional desires to spend on infrastructure. This strategic mistake was avoidable, and the recovery will be delayed because of it.
We all have our weak spots, even the best analysts of which Keith is one. Unfortunately for Keith, one of his weak spots is an abiding belief in Keynsian aggregate demand management. How else to explain his argument that increases in government spending or tax cuts that have little or no effect on incentives to produce are completely ineffective in stimulating the economy?
Without a doubt, these ineffective means of increasing the national debt (which is their only substantive consequence) will increase elements reported as part of the GDP. Increase cash in peoples pockets as President Bush used to say and you will see some increase in consumer spending. Throw more money at roads and youll see more investment. Bail out the states so they dont have to cut spending as much and youll see more state spending.
But, total GDP is unchanged, unless you believe in magic. The trouble, as I describe at some length in an article in Townhall this month, is that the government has to borrow the money, either from domestic or foreign sources, and the effect is to reduce other areas of demand or to increase the net trade deficit. So this reshuffles total demand without increasing total demand, leaving the economy just as weak or weaker because the national debt is higher.
Federal spending cannot magically conger up purchasing power, only monetary policy can do that temporarily.
So, as the Fed observes that nominal GDP is growing faster than it should, it will respond by slowing the rate of growth of the money supply. Monetary policy is so powerful that it overrides fiscal policy.
The current activity by Congress and this administration, reminds me of the 1970s, though at that time in my life, I didn’t pay very close attention to politics. I did note that Congress seemed to be zigging when the economy was zagging which meant the economy was zigging when the effect of the Congress zig went into effect. This seemed to produce an undamped changing economy – it just never reached stability. The rules were always changing. The end result was stagflation. According to Greenspan’s book (The Age of Turbulence), not one of the economic models of the time predicted stagflation. It didn’t end until Paul Volcker pledged to “kill” inflation. Could we be in a similar situation? Would models today recognize and predict stagflation?
Small business is still, or again, having trouble getting loans and one has to wonder if the economy would have turned around without all the government intervention. After the Chrysler and GM results, it feels like money has stopped moving once again because it seems the old rules no longer apply.
In a period of time where massive deficits are on the rise and the eventual rise in either interest rates of inflation crowd out private investment and push the government larger, the increases in aggregate demand at the beginning of next year will exacerbate the issue of inflation. Fed Chairman Bernanke has said lately that he will not monetize the debt, but this will hard for him not to do with a Democratically controlled Congress and his job on the line in 7 months.
What we continue to see is a country who is becoming more and more dependent on the federal government from the latter part of 2008 under the Bush Administration and even more so in only 4 and a half months under the Obama Administration. The government can only hold our hand so long before we find ourselves not knowing how to walk. While these increases in government programs may cause increases in GDP and provide some jobs (not nearly the 3.5 million they have expected over the next two years with only 150,000 being produced so far from the stimulus package), these are government supported jobs and the Keynesian multiplier that they would like to count on is very very low in the current environment, possibly below 1. So fewer dollars will be redistributed around the economy and the eventual rise in either inflation and/or interest rates will all combine for a rough ride for the next couple of years. Just a thought!
Keith –
Despite the fact that the disbursements related to the stimulus have not been paid, don’t they have a stimulus effect in that they are earmarked for spending? I guess it depends on how much of the current recession you attribute to the downward spiral of lower income and lower demand, but won’t this planned expenditure encourage growth in industry by improving the future economic outlook? And won’t an improved economic outlook stave off layoffs and increase investment (you imply that the saving rate is higher than normal right now, won’t this encourage more private capital to come in off the sidelines in anticipation of a huge wave of government generated demand?) And it seems to me that this effect would ripple though to stimulate other areas of the economy.
Of course this does nothing to address inflation or the fact that the stimulus may come at a time when we are looking to restrain growth… but I think the effects in the short term may be a little more than you are giving it credit for.
As a moderate democrat, don’t always agree with you but enjoy your work.
The problem with the governments spending program is that the things it produces do not have to meet a market test. How many of the 3.7 million jobs created or protected in the $787 billion stimulus bill are being pulled out of more productive work elsewhere? The thousands of green jobs created will not produce anything the market is actually willing to pay a high enough price to cover the costs. These new jobs will require higher taxes to keep the government subsidies running. What about the jobs that are not created because of the higher taxes used to pay for the subsidies? Equally pernicious are the mandates that will require people to use this stuff. The resources taxed by the government had been deployed in activities that were producing things people actually wanted. The monetary expansion is creating the same sort of problem. The extra credit being supplied now is leading to higher government and private debt much of which will again prove unsustainable when inflation causes it to be withdrawn.
I can think of three plausible explanations:
1. The President and his team did not realize the analytical point that infrastructure spending has too slow of a GDP effect.
2. They were disorganized.
3. They did not want a confrontation with their new Congressional allies in their first few days.
You don’t mention
4. They couldn’t care less about stimulus, and were using the stimulus rhetoric to throw a bone to Congress, allowing them to fund a bunch of longstanding Dem priorities that would otherwise never get through.
5. They were not interested in speed. They were mainly interesting in ramming through a bill which would provide the bulk of its stimulus in the election years 2010 and 2012, and in making sure they had lots of discretionary money to spend in those years to reward their political allies.
I have two quite unrelated questions, Mr Hennessey, which are raised by your text:
1. By what reason do you object to sending payment to those which do not pay income taxes? I don’t realize the objection on two grounds, but we may be looking at it differently.
a. Once the government has decided it best knows how and when I need my money and begins effecting those decisions for me without my consent; I dont see why it is different for them to dispose of it entirely. (Think of the stimulus this way, if you pay me $600 this year, but you financed it by running a deficit, youve essentially taken a loan out on my behalf which I am obliged to repay at interest. I dont think youd quite appreciate it if a neighbor went to BestBuy, bought you a computer on your credit, but when the delivered it assured you that, It’s for your own good; you really needed a new computer now, not whatever else you would do later. Once he started spending my money at the store on my behalf without my agreement, it wouldn’t seem that much different if he just started spending it on other people too.)
b. Just because one doesnt pay income tax now doesnt mean he wont in the future. Again, with it financed on a deficit, quite a few people who didnt pay in that year are still likely to pay back more than the checks value before the loan used to write the check is even close to paid off.
2. But even 1/4 or 1/3 of $787 B is still a lot of money to dump out the door. Yes, it is. How would this not lead to tremendous burst of price inflation? Traditionally youd look for inflation to be moderated by the stimulus first drawing up slack by hiring the unemployed. However, we hadnt hit a very high rate of unemployment generally, and it would take time to retrain someone from work in the most contracting sectors of housing and finance for some other employment — time when the money is already circulating. With it coming so fast, I dont think there would be enough time for businesses to have any idea of what was going on or what their real long term demand would be. I think that would effectively freeze the hiring market, regardless of a boost in short-term demand, because of long-term uncertainty. It would at best promote temporary jobs. The same goes for firing, as it would be at best temporary respite as business waited to see what the real long-term market for their products was. I dont think there is compelling evidence to suggest that if demand could be stimulated long enough (call it T), that a business that waited T before deciding about layoffs would decide that fewer were necessary, or that they werent necessary at all. Such an assertion is speculative at best. This complete scenario as an argument only works if one believes that business and people behave entirely differently than each other: people are skeptical and reticent about short term, temporary income; but business respond to temporary income in exactly the same way as they respond to permanent income.
It is commonly taught in economics that monitary tools are more effective and timely than fiscal policy in stimulating the economy – primarily because it is more timely. Moreover, contrary to textbook theory taught by new Keynesians as Greg Mankiw pointed out, the empirical studies done so far strongly suggest that tax cuts have a much larger multiplier than government spending increases – even Christine Romer’s own work suggests it.
The problem with “the Stimulus” is that it did not meet Larry Summers own criteria, i.e., that it had to be timely, targeted, and temporary. The policy is supposed to be counter-cyclical, not pro-cyclical. And it has to be temporary as the stimulus from spending loses effectiveness (and begins to crowd out private investiment as the recovery continues).
The Obama plan has some positive aspects (it contains some business tax cuts), but as a whole it is bad policy. Nick Bloom of Stanford modeled the economy and predicted in January that without any stimulus that the economy would bottom this summer, with a V shaped recovery. Other models, prior to the stimulus, show a similiar conclusion as to the bottom.
To date, the Stimulus has distributed 37 billion dollars, an insignificant amount (perhaps 5% of the total). The stimulus won’t start having an effect untill the spring of 2010, by which we will already be on the road to recovery. And in the meantime, the stimulus will likely force growth a bit faster through 2010, and be useless in 2011.
And the result? According to the administartions own numbers we will end up with a deficit of 1/2 trillion a year. According to other economists, the deficit will be 3/4 to 1 trillion a year.
The ‘stimulus’ is too late, too diffuse, and too permanent.
Prior to the publishing of worse than expected GDP contraction in the first quarter of 2009, Ray Fair ran his baseline economic projection with and without the stimulus expenditures as timed by the CBO in Feb 2009. Although the stimulus numbers and actual timing are in need of updating, the model is useful in comparing the effects of the likely tradeoffs of a stimulus.
If the original CBO projected timing of the expenditure funds were carried out then the effects he projected were quite robust for the last 3 quarters of 2009 and first 3 quarters of 2010. With the stimulus the projected growth for the last 3 quarters rose from 1.3 to 3.2 percent per quarter (annualized rate per quarter). Without the stimulus 2009 would have just bottomed in the 3rd or 4th quarter. In 2010 in both cases the economy would grow quite well, with the non-stimulus baseline growth rate catching up to the stimulus growth rate by the the third quarter of 2010. Then the 4th quarter stimulus ends and the growth rate drops quite a bit while in the next nine quarters the baseline non-stimulus provides substantially more growth. The “stimulus” projection sharply drops to an annualized 1.5% growth per quarter (typically) while the baseline non-stimulus provides for 3% to 4.5% (typically).
It would seem that the economic tradeoff is (with a timely stimulus) that one can force recovery sooner by 3 quarters, and lower maximum unemployment by about a percent IF one is willing to pay for the debt indefinitely and/or raise taxes (which would lower growth). Given the deficit projections made by many economists over the last several months, it doesn’t sound like a worthwhile long-term tradeoff.
It seems to me that timing the recovery to happen right before midterm elections would be intentional, yet that aspect is omitted in the analysis, (though included in some of the comments.) Keeping the recovery going for the next Presidential election would also be intentional, thus the long term plan.
The analysis also avoids discussing the 2002 tax cuts. Giving money out to everybody does not make a dent when trying to improve the economy. The economy improves when we encourage people to take risks in investing and building businesses, by letting them keep more of their potential rewards. The risk takers end up paying more taxes than they would have paid avoiding risk. This then makes new jobs, increasing even more the benefits to the economy and to the benefits of all governments.
Also mentioned in some comments, are the detrimental effects of borrowing all this money. It prevents the use of this money for other purposes. And it will impose a heavy burden on the economy as we either raise taxes to pay this off, or inflate the money supply. The third option, maing other people rich by having our children pay them seems to be drying up.
But there is a horrible cost of wastefull spending. The author discusses ‘losing’ the benefits as if it is OK to spend 100′s of Billions of dollars, and not get a practical benefit back from spending that money. The economy shrinks when money is wasted. That is true if you make a bad investment, if you blow your money, or if the government takes your money and makes bad investments or hands it to other people who will blow it for you.
Thus the big difference between handing out money to spend, and encouraging people to invest their money by allowing them to keep more of the rewards. The levels of waste in the former are much higher than in the latter, and the money at risk is not the governments. Once the former is blown, the hands are back out begging for continued assistance. One time assistance just makes the bar owners and pimps happy. Permanent assistence, while creating some jobs, government, as well as a few productive jobs, crates a subset of unproductive people, reliant on the output of their fellow men. And one time tax credits don’t encourage changes in investing or other behaviour. But permanent tax reductions for those willing to invest and start businesses, builds the economy and creates new jobs for others, both of which increase government revenue, paying for itself.
So only a tiny fraction of the stimulus will build the economy and pay for itself, while the rest builds something, or is just wasted, by preventing productive growth elsewhere.
But, much of it is designed to strengthen the Democrat Party, and increase dependence on Government. Or as it is referred to in other comments, ‘not letting a crisis go to waste.’
So I strongly recommend disbelieving everything this President says, and only relying on what he does to understand his goals. Taking his statements about his policy preferences at face value is playing his game. Don’t be suckered in.
Although a bit premature, it may be time for a little opportunistic hindsight. The question that interests me is “Did the stimulus affect the depth or timing of the recovery”? The CBO’s latest projection proffered by Mensie Chinn suggested that if timing was not effected, then the depth of the bottom recession would (will) be much greater. So let’s review:
The earliest indication of a recovery by this summer was the dramatic turnaround in business confidence, first detected in late January by Nick Bloom and his economic models. Then in early February Tony Crescenzi of Real Money noted that the yield spread of 276 basis points signaled that the chances of recession 12 months hence was very small (a study by Estrella and Mishkin found that a spread of 121 points was associated with just a 5% chance of recession). He noted that: “Treasury curve has right-sized since February 2008, roughly a year ago. Today, 10-year govs are roughly 3 percent, while the 3-month Treasury bill is about 0.25 percent. This, of course, is a sign of monetary ease usually with about a one-year lag the economy responds to this therapy. Well, its about a year right now. ”
Also in February there were indications that commodities, such as copper had bottomed, and the Baltic Dry Index had bottomed and just started crawling up. Interrupted (but not affected) by a sharp V in the stock market bottom (primarily an artifact political rhetoric and fear of the ‘radical’ programs) just after mid-April the trend was clear in the BDI, with a 35% gain over the February bottom. (The BDI is an excellent indicator of world trade, recessions, and recovery. The BDI collapsed in October of 2008, signaling the deep recession).
By April 30th, prognosticators had noted: “…both the OAS spread and the VIX continue to show signs of improvement and are trending towards the typical range. April saw OAS narrowing by more than 1% while VIX declined by nearly 8%. All three leading indicators TED spread, OAS spread and VIX continue to show improvement over the last quarter of 2008.”
In late April to present, the weekly new claims for unemployment started falling – another trend towards recovery. Then in May, the Leading Economic Indicators showed a 1% jump, while the University of Michigan’s Consumer Sentiment Index also rose more than expected in May, to post its third consecutive increase in three months.
I’ve also noted that “now Consumer incomes, after tax and adjusted for inflation, have increased for five straight months, which is largely from the tax-cut effect of plunging energy prices.”
So what role has the “stimulus” had in the pending or current recovery? At the moment very little. Of the 47 billion dollars “distributed” according to Jarad Bernstein (Biden’s economic adviser) just 30 billion dollars have be spent (that may include the unemployment benefits in the package).
Given the current and prior indices’s turnarounds prior to spending, I doubt the negligible “stimulus” spending affected (or will affect) the timing or depth of the bottom (which is upon us). In other words prior CBO projections of a much deeper bottoming without the stimulus are undermined by the fact that the bottom seems to be here (one commentator thinks it may have already bottomed) but the stimulus is still miniscule.
In any event, we really won’t know for sure for a couple of more months. But so far the recovery was already indicated by the market months ago, and that the stimulus has(so far) been useless in either setting a bottom or in “starting recovery”.
Of course, the next argument will be over how fast the stimulus ‘pumps” up the economy from the bottom; and by January of 2010 we ought to seem some portion of additional growth due to the stimulus.
The bill will be due in 2011 through 2020.
PS James is correct. I too have noted that the urgency of the stimulus might have been driven by the 2010 elections.
HOW THE STIMULUS PLAN HAS BEEN WORKING ALREADY AND WHY IT IS BOUND TO GATHER PACE
The stimulus plan in of itself has halted the dramatic plunge in business and consumer confidence with the very likely threat of an economic depression earlier in the year, and businesses and consumers taking a less weary and more upbeat attitude to the future. Maybe more than anything else this will be the most significant impact of the stimulus package in the long-run enabling a spectacular recovery from the real possibility of depression before its passage. Businesses and consumers have become more and more confident that spending from the stimulus in the upcoming months will provide a solid environment for economic activity thus encouraging investment, reducing the pace of job losses and encouraging consumer spending. In other words, the stimulus package has avoided a cycle of economic downturn to depression and is now about to engender a cycle of economic upturn to recovery.
The stimulus package cash handouts and other social initiatives have played no minor part in lessening the burdens on individuals of the economic downturn and the consequent increase in the number of people unemployed thus palliating the effects with regards to mortgage, health coverage and consumer spending.
The stimulus package has halted the lost of jobs in the areas of education and other state level services and enabled States to avoid budget bankruptcy (caused by the fall in revenues due to the economic downturn) with the result of avoiding indirect job losses in the private sector as well.
The stimulus package is bound to lead the way for new jobs creation to be followed suit by direct private sector investments with the consequence of increasing spending in the economy and accelerating economic recovery. It should be noted that jobs created by the stimulus will have a multiplier effect in the creation of jobs by private enterprises.
Perhaps more fundamental for long-term economic recovery, given the areas of investment of the stimulus package (infrastructure, energy and green jobs, education. etc.), it is the type of government investment required for renewing long-term economic growth. As was the case with FDR’s New Deal in the 1930s and Eisenhower building of interstate highways and investment in the sciences in the 1950s, the stimulus package is bound to restructure the foundation of the US economy within which private enterprise will thrive.
The fundamental element in the criticisms levied against the stimulus package that it will increase the US deficit is the total disregard by most critics of what would have happened without the stimulus with respect to avoiding the real threat of a depression, raising business and consumer confidence and restructuring the economy. Thus providing a good foundation for real growth in the long-run (boostered by the Stimulus and led by private enterprise) with economic growth by itself and healthcare reform allowing for deficit reduction in the long-run.
While the Stimulus Package has often come under this one-sided criticism of increasing the US deficit, such an argument can only be credible to the extent that it elicits how the results mentioned above which have been obtained (and are to be obtained) by the Stimulus Package could have been attained otherwise. Most critics of the stimulus package seem to think that this economy which was at the very brink of collapse simply avoided a depression by some miracle and that by the same token recovery is bound to occur by magic. To the extent that their arguments fail to answer these fundamental facts about avoiding a depression and beginning a recovery, to that extent, such arguments can hardly be considered credible.
Actually, the initial impact of the stimulus for private enterprise and consumer confidence has been anticipatory in that it arrested a situation where the trend of business and consumer confidence was heading the economy to a depression. That is why the statistics point to the fact that business and consumer confidence stop plunging after the stimulus plan was passed and the stock market has been going north since then. It is the anticipation of the impact of the stimulus plan that has stabilized business and consumer confidence, heading off the real prospect of a depression. In other words, the stimulus package first impact was to act as the brakes for an economy that was heading to a depression disaster.
http://www.rususa.com/money/finance.asp See link above for the effect of the stimulus plan on the stock market immediately after its passage in mid-February 2009: the NASDAQ, Dow Jones and S & P 500 have made a dramatic U-turn upward since March 2009.
The reason for the high job losses is very simple. Those jobs were going to be lost anyway as business and consumer confidence entered a vicious cycle to depression following the failure of the financial system – these job losses arose out of lack of confidence in the financial system. Actually, the stimulus role at the onset more than any immediate spending in the economy itself has been to provide assurance to consumers and businesses that government will spend in the economy thereby upholding consumer and business confidence and avoiding the real prospect of a depression. So the stimulus first role has been “anticipatory” in forestalling a depression.
Believe it or not, it is not out of the question that without the stimulus plan we might have been talking now about the loss of not 1.6 million jobs but 5 or 6 million jobs at the trend at which consumer and business confidence went on falling before its passage. See link on the rise of consumer confidence since the stimulus plan was passed in mid-February 2009.
http://www.market-harmonics.com/free-charts/sentiment/consumer_confidence.htm
Actually, the word “stimulus” here can be misleading in that it underemphasizes the effect of the stimulus in arresting a grave and downward spiral of the economy and rather draw focus mainly on creation of jobs which is the second and yet to fully come dimension of its impact.
Let’s imagine that the stimulus plan was to be suspended now. What will happen is that the anticipation consumers and business had about its boosting effect on the economy will die out, and this of itself will create uncertainty and may well lead to a new downward spiral. The Stimulus has a double effect with respect to recovery and job creation. Perhaps the lesser acknowledged effect is the confidence created in the economy for private enterprise and consumer consumption. In fact, this indirect effect will be the strongest push for economic recovery and job creation. Then there is the direct effect of the Stimulus Package spending and its multiplier effect given the areas of expenditure (education, infrastructure, green jobs, etc.)
While critics are pointing to the fact that unemployment is already at 9.4 percent compared to the prediction of 8.8 percent for 2010 made by the Administration, many forget that Economics like Meteorology or Earthquake Prediction for that matter is “no Physics or Maths”. What ultimately matters is the bigger picture and trends. Going by the job loss figures for March, April and May (652000, 504000 and 345000 respectively) the argument made by the administration definitely holds. In fact, the Fed, the Treasury as well as other institutions involved in the prediction of economic data tend to revise their figures quite often. What matters is the trend and bigger picture.
The Stimulus is rather like a project but in this instance a massive and complex national project. A project can be broken down in two broad categories: design and execution. At the design stage (the first few months of the Stimulus), everything is being organised and put in place administratively with relatively little being carried out. The upcoming months will be the period when the massive spending and investments will be executed at an exponential rate. In fact, 1 billion dollar is already being allocated each day for Stimulus projects.
In laymans terms, the Stimulus is needed for the simple reason that with the failure of the financial system, businesses and consumers were less willing (uncertainty) and less able (banks failures and failure to provide credit) to produce and spend in the economy implying that companies sold less goods and services than usual and so the companies had to lay out workers who in turn bought less and so the cycle goes (and this might just as well have led to a depression).
What the stimulus is meant to do, and is doing, is to incite and give businesses and consumers the confidence to keep on producing and spending respectively for the upcoming spending in the economy it is to generate exponentially. Initially by giving tax breaks, benefits, spending to maintain teaching and social services jobs and then spending on stimulus projects contracts given to companies which are then encouraged not to lay off workers. All these with the consequent multiplier effect in the economy.
Companies and consumers effectively bought to this idea once the Stimulus bill was enacted and kept on producing and consuming respectively in anticipation that upcoming Stimulus spending will maintain a stable economic environment from which recovery is possible. Hence the reason why the stock market and consumer and business confidence started rising. This effort was accompanied by the bank bailout and efforts to provide credit to consumers and companies.
It is effectively because the Stimulus Package is real, a commitment of 789 billion dollars by the US government for real economic projects, that consumers and businesses bought to the scheme and started acting in a positive manner in anticipation of its positive impact in the upcoming months (the Stimulus Package direct impact should enter in full force by the fourth quarter). In fact, many economists have even argued that the amount provided for the Stimulus should have been much more higher.
As a final note, Ill argue that irrespective of party creed, it will seem to me that the criticism levied against the Stimulus is much more of a political vogue (and has nothing to do with realistic economics) naïvely taken up by the media which tend to operate on the basis of two sides to any story (not a criticism though). The milestone which any such critical arguments has to overcome is to answer the question: how could a depression be avoided and a recovery started following the failure of the financial system?
If the incompetents in Congress who passed this boondoggle of a bill without even reading it, has instead distributed those same funds to the 330 million people in the US, they would have sent a check of almost $2400.00 to each person. Now, you tell me, what effect would an infusion of $10,000 to a family of 4 have on the economy? A whole lot more than what this ‘stimulus’ has given us to date. But the left is under the delusion that THEY know how to spend YOUR money better than you do. What an arrogant bunch of a$$holes.
“If the incompetents in Congress who passed this boondoggle of a bill without even reading it, has instead distributed those same funds to the 330 million people in the US, they would have sent a check of almost $2400.00 to each person. Now, you tell me, what effect would an infusion of $10,000 to a family of 4 have on the economy?”
It would have been a much more efficient means of getting money into the economy (as well as being a sort of disproportionate tax return, heavily weighted towards those who pay no income tax). But (as said above) the real reason for the stimulus bill was to take advantage of the democratic victory and push through worthless vote-buying programs for dem members of congress. Eevn their own survival is more important to the Pelosis and Boxers of the world than throwing a bone to the poor.
Well there's some misrepresentation of the stimulus going on here. One-third of it was for tax cuts. Other large portions of it were just to prevent state and local governments from having to lay off teachers, police and fire fighters. Other parts were for infrastructure, green energy jobs, unemployment and subsidized health care. I think that the money spent on infrastructure was kind of a waste since the money had to be spent fast and the infrastructure we need are long term projects. I would agree that more money should have been spent on tax breaks.
- Slon
I agree with your additions of explanations number 4 and 5. Perhaps Mr. Hennessey, after having served in the Bush Administration, is inclined to give the current administration the benefit of the doubt. I think the rhetoric following the passage of this “stimulus” (ie don’t waste a crisis) along with the sudden urgency for shovel ready projects and the appointment of “Sheriff Joe” makes it clear the President and his team only later became concerned with stimulus. Unfortunately the President and Sheriff Joe forgot that you can’t make a silk purse from a sow’s ear.