In February, President Obama signed the massive $787 billion stimulus bill into law with the idea of jump-starting the economy with spending on everything from tax cuts to new highways to programs to increase energy efficiency. The size and specifics of the package-and even whether it was necessary at all-were hotly debated, and the resulting bill was supported by only three Republicans in the Senate. Seven months later, what can be said about whether the stimulus package has worked or not?
The answer is that at least some of the spending has goosed the economy. But it's a tricky business to assign credit-if a start-up hires six people, was it the entrepreneur's vision or the government grant that was responsible? And the jury's still out on all the stimulus money that hasn't even been spent yet.
In many ways, the Cash for Clunkers program, which offered rebates of up to $4,500 to consumers for upgrading to new, more fuel-efficient cars, exemplifies the debate over the effectiveness of stimulus spending. The program disbursed $2.9 billion in rebates, spurring the purchase of close to 700,000 new cars and giving a much-needed boost to the faltering auto industry. Critics accurately point out that many of those purchases would have been made anyway in the future, without taxpayer subsidies. But one of the primary goals of stimulus spending is to get people spending money now, while the economy is hurting, and Cash for Clunkers certainly did that. (See our earlier story, "Did Cash for Clunkers Really Work?")
As a result, both GM and Ford announced they were adding workers and shifts to help meet the increased demand created by the program, and other auto-related industries were helped as well. And the workers whose jobs were saved or whose hours increased had more money to spend on nights out at Applebee's, and the waitress at Applebee's had some extra cash to buy fall clothes for her children, and that in turn boosted retailers' fortunes. Economists call it the multiplier effect, and it's a key component of a successful stimulus program.
"[Cash for Clunkers] was a much needed leg up for the auto industry at a time when suppliers were hanging on by their fingernails," says Diane Swonk, chief economist at Mesirow Financial and former president of the National Association for Business Economics. "If it prevents some suppliers from going into bankruptcy, extra production at that stage of the game is a pretty good payoff."
But the $2.9 billion spent on Cash for Clunkers was only a very small portion of the entire $787 billion package (see chart above). Among the many programs big and small being funded now are $1.6 billion to help save 800 jobs at the Savannah River nuclear site in South Carolina, $120 million to create new jobs at the U.S. Census Bureau to analyze results from the 2010 Census, and even $220,000 to preserve jobs in the Isanti, Minn., Police Department. Economists polled by the National Association for Business Economics predicted that the government's stimulus spending will add between 0.5 and 1.5 percentage points to the economy's annualized growth rate in the second half of 2009; by comparison, in the second quarter, GDP declined by 2.4 percent compared to a year earlier.
However, it's important to remember that not all stimulus spending is the same-simple rebate checks, for example, are usually saved or used to pay down debt, which doesn't lead to any additional economic activity. The true indicators of the effectiveness of any stimulus spending, as discussed and debated in this MoneyWatch article, are whether it leads people to spend more money than they otherwise would have and if it results in follow-on economic activity, as Cash for Clunkers did.
Complicating the problem of evaluating the effects of the stimulus package is that four-fifths of the money set aside hasn't even been spent yet, according to Recovery.gov, the government's Web site tracking the spending. Infrastructure and health care projects, to give just two examples, take time to get off the ground. In New York City, for instance, the mayor's office announced in August that federal stimulus spending will help fund the construction of 739 affordable housing units-creating 2,800 jobs. But turning those plans into construction sites, hiring contractors, getting permits, and so on, doesn't happen overnight, so the new jobs and presumed ancillary effects will only unfold in the coming months and years.
"The real guts of the stimulus spending won't show up until well into 2010 and 2011," says Swonk. "The bigger bang for the dollar is going to be on the construction projects that wouldn't have been there otherwise. But they take a lot of time to get going."
As a result, economists say we really won't be able to make a definitive call on the success or failure of the stimulus package for years. In particular, they'll be looking for signs that consumer discretionary spending is increasing on a consistent basis, since more than two-thirds of the American economy is driven by consumer spending, and payroll numbers continue to improve. Indeed, Swonk says jobs are key. "That's how the American public measures it," she says. "That is what voters vote on-jobs. They don't vote on a technical recovery in GDP." One worrisome sign for the labor market is the sharp 6.6 percent jump in labor productivity in this year's second quarter. That's the highest rate since 2003, and it suggests that corporate America is learning how to produce more goods and services without expanding payrolls, increasing the possibility of a jobless recovery. Expect disappointing numbers when states release mandatory reports in October on their stimulus spending: The state formula doesn't take the multiplier effect into account.
The Final Accounting
Even if the economy does pick up in the next few months, it will be hard to assign credit to the stimulus package. That's because the Federal Reserve has been providing vast amounts of monetary stimulus to the economy, cutting interest rates to near zero and doing other things to boost liquidity and spur lending such as buying up so-called toxic securities from banks.
The problem is that when you rush a patient to the ICU and inject him with three drugs, it's tough to know which one saved his life. We don't know how the economy would have fared had the stimulus legislation died a quiet death on Capitol Hill this past winter, although we do know that the monetary stimulus has been massive.
"The really big bazookas have come from the Federal Reserve," says Swonk. "They've got $2.2 trillion on their balance sheet."
Even if we assume that the stimulus package will reduce the severity of the recession, as many economists do, will it have been worth the cost? The nonpartisan Congressional Budget Office estimates that the federal budget deficit for 2009 will total $1.6 trillion, or more than 11 percent of GDP. The stimulus bill, even when it's fully spent, will only be responsible for less than half of that, but it's still a serious chunk of change. The mounting red ink increases the risk of the "crowding out effect"-higher borrowing to finance the deficit means more investment in government and less private investment. It also sends interest rates higher. In effect, we may be borrowing growth from the future and at a steep price.
The Federal Reserve's actions could also contribute to higher interest rates and higher inflation down the road, since the Fed has been printing money and lowering interest rates. In some ways, that's the point-inoculating the economy against a lengthy bout of deflation-falling prices-is a key goal of the Fed's monetary policy of late. The trick will be nipping the inflationary effects in the bud so that they don't end up gaining momentum and hurting economic growth in the long run.
The full price tag for stimulating the economy may eventually look reasonable, but only if all or most of the government spending greases the wheels of the economy and leads to additional spending and economic activity. Stay tuned.
James Picerno is editor of the Beta Investment Report.
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