Stimulus 102-- One Year and $800 Billion Later
Original post made by stephen levy on Feb 20, 2010
Let's start with two simple truths. One, the economy has been much worse than expected. The nation has seen 8 million jobs disappear and unemployment rates appear destined to stay near 10% for quite a while. Two, if Barack Obama (or George Bush) says that today is Monday, there will be a chorus of people saying no, today is definitely not Monday, the President is wrong again.
Why is the economy worse than expected one year ago and how does that affect our assessment of the stimulus program?
The nation lost 7.3 million jobs between December 2007 and June 2009 according to recently revised estimates, much more than had earlier been reported. Since June 2009 we have lost an additional 1.1 million jobs, again more than expected. The explanation about why the recession was deeper and longer than expected is straightforward if you put politics aside.
One, we are doing worse now because in retrospect we were doing much worse than we thought before the stimulus could ever kick in.
Two, we were doing worse because construction levels kept falling, consumers used resources to pay off debt and businesses seeing no customers and an atmosphere of fear reasonably reduced staffing and deferred investments. We had and still have a shortage of customers, so no job growth.
Three, the stimulus program did not fully meet the criteria of being timely, targeted and temporary. I can't defend much of the stimulus package although I like some of the parts that aren't stimulus by the usual definition. Roughly $ 70 billion went to prevent the Alternative Minimum Tax from jumping in the April 2010 tax returns. The AMT should have been funded with other taxes or budget cuts -- it is not stimulus. Much went to programs that I like such as energy grants and extending aid to college students that are part of the President's long-term agenda, not anti-recession stimulus spending.
Four, as a result just over 1/3 of the stimulus money has actually been spent so far including very little of the infrastructure spending. An equal amount is scheduled to be spent in 2010 clearly leaving a substantial amount for after 2010, not timely in any sense from the perspective of February 2009 when the stimulus was adopted.
Once you put the "it must be Tuesday because the President says it's Monday" crowd aside, there is broad agreement that the stimulus, politicized by both parties as it was, has helped. We had hoped the unemployment rate would be 8% instead of 10%. What we got was an unemployment rate around 10% instead of 11% or higher. GDP is higher by 1-2% compared to where it would have been without the stimulus.
The stimulus had the effect of saving some jobs, and creating a few, in a context where the rest of the economy was still laying off staff. This is seen in classrooms, in police departments, in the stores where people who got extended unemployment benefits shop and in the few infrastructure projects underway,
Voices such as the well respected libertarian Economist magazine and the Committee for a Responsible Federal Budget (CRFB) agree that the stimulus helped. CRFB has a short analysis outlining these points while again urging focus on the nation's long-term budget crisis. See Web Link .
Where do we go from here?
Americans are reasonably concerned about two dangers: 1) the lack of job growth and 2) the impending explosion of federal deficits and debt. The answer is straightforward but is hard to implement in a climate of distrust and a climate where everyone wants problems to be solved with someone else's money.
From my perspective we need more short-term stimulus and more long-term fiscal responsibility. Doing both is like walking through the raindrops without an umbrella and staying dry -- really, really hard.
A longer recession benefits no one. More people are without jobs. More people are in danger of losing their home. Government revenues and services are cut and the federal government deficit rises.
Our troubled waters are deeper than expected and we need to build a longer and sturdier "bridge over troubled waters."
It is right to view getting out of the recession as a two-step process. The first step is policies to get spending growing again by attacking the "there are too few customers" problem. But the second step is scary. That is when and how much business will respond to increased spending with hiring.
Watch out for the second step. In technical terms economists are wondering if the link between GDP and job growth has been temporarily broken or decoupled. Right now we are in the sixth month of GDP gains with no job gains.
Still, it is right to press on with policies to support spending in the economy.
Currently now the Congress is debating another stimulus package and timidity rules the day. Now is the time to go back to timely, targeted and temporary. The case for another year of aid to state and local governments is the same as the case for extending unemployment insurance benefits. The need is still there and the money will be spent immediately.
Infrastructure is another winner -- short term benefits and we end up with an asset that will keep giving. By now we should have a backlog of shovel ready projects that can go immediately.
For the people in Congress who know this is the right course and for their supporters this is the time to stand up and put getting reelected by playing safe off for another era. We are in serious trouble and it is time to put country first. To people who disagree with this path, let's debate it out without name calling.
Long-term deficit reduction is a much tougher sell because it can't be solved just by the "other folks" footing the bill.
The simple truths for a starting point are one, we have made promises with regard to government health care and Social Security programs that are no longer financially sustainable. Even though these are promised benefits and even though residents have paid into these programs, they are unsustainable and need to be adjusted.
We need a new social and fiscal contract.
Two, the federal deficits and debt are largely related to out of control health care costs and predated the recession. Groups like CRFB have been warning for a decade about the coming crisis. It is not the result of the recession and stimulus package and most Americans have their fingerprints on not solving the problem.
The straightforward answer, the one that Alan Simpson and Erskine Bowles gave last week when they were appointed to co-chair the deficit reduction commission, is that a combination of benefit reductions and tax increases will be needed. This is true even if we are successful in reducing health care cost growth, which is critical to success in deficit reduction.
People who think that this is the fault of one party or another or that it can be solved only through benefit cuts or privatizing these programs are living in an alternate universe from my perspective.
If Americans want problems solved "in the center" here is a great opportunity for sharing in the design and the costs of putting the country on a more sustainable fiscal course.
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