The Economic Stimulus plan — A lesson in Failure
-Barack Obama
On the one-year anniversary of President Obama's signing of the massive economic stimulus bill, known as the American Recovery and Reinvestment Act, the White House was seeking redress. Obama and the president's political arm at the Democratic National Committee were casting the program, initially priced at $787 billion, and now estimated at $862 billion, as a demonstrable success.
In January 2009, the soon-to-be head of the Council of Economic Advisers (and dumbest person on earth), Christina Romer, promised the American people that the $1.1 trillion stimulus bill (with interest) would keep unemployment below 8%, create millions of jobs and jumpstart the economy. One year and hundreds of billions of dollars later, unemployment is near double digits and 3.5 million more Americans have lost their jobs. More specifically, in January 2009, non-farm payroll employment totaled 134.3 million jobs. The White House estimated that without stimulus, the number of jobs would fall to 133.9 million, while the stimulated economy would total 137.6 million jobs by fall 2010. The stimulus was enacted, yet the number of jobs has since fallen all the way to 130.8 million. Regardless of these facts the Obama Administration still claims that the program has been a great success and the American people just don't 'realize it.'
But the public's response to President Barack Obama's recession-fighting policies has been increasingly dreary. And the reason is simple: six months of unemployment above 9.6 percent. Support for the stimulus plan has gone from 55 percent last June to 38 percent, according to a poll by the Pew Research Center. Support for the stimulus among voters who identified themselves as Democrats fell 18 percentage points, to 60 percent. While the tax cuts Democrats included in their bill have the backing of 70 percent of the public and another 80 percent support the infrastructure investments, 56 percent of the public opposes the broad plan, according to a CNN poll. And only six percent of respondents in the recent New York Times / CBS News poll believe the stimulus has created any jobs. (Hell.....seven percent believe Elvis is still alive)
"For the first time, we have as many people saying that Obama's policies have made things worse as say his policies have made them better," said Pew Research Center President Andrew Kohut.
Unemployment trumps all else. It provides a lens through which the public reads an economic narrative of bank bailouts, executive bonuses, expensive health care reform and exploding debt. White House officials maintain that the stimulus suffered a certain guilt by association with the unpopular $700 billion TARP program used to help stabilize the banking system. "People have conflated money lent to banks, or investments that had to be made in restructuring auto companies, with the recovery plan," White House spokesman Robert Gibbs said. "I'm not sure exactly what could have been done to rectify that." But Pew's Kohut says the public does distinguish between the programs, and while more disapprove than approve of both, people have a much more negative reaction to the bank bailout, that was effective and efficient, than to the economic stimulus plan, that was not.
The administration has had to make some corrections along the way, which haven't helped the salesmanship. In January 2009, Obama administration economists predicted the stimulus would provide a sizable jolt to the economy and hold unemployment to 8 percent, compared to 9 percent unemployment without a stimulus. It didn't. Instead, unemployment rose to a high of 10.1 percent in 2009 before falling to 9.7 percent in the first two months of 2010. The administration also sought to make the program a model of transparency, posting data on spending, projects and contracts. New or saved jobs, administration officials said, would be counted. But the data exposed several serious counting flaws, including greatly exaggerated job claims, positions included that had nothing to do with the stimulus, and spending that had nothing to do with saving or creating jobs. It was a blow to Obama's efforts to prove the stimulus truly performed as promised, and it ended with the White House having little choice but to estimate job creation after all.
The White House is now spinning unemployment by claiming its earlier economic projections, not the stimulus plan, was in error. Now it claims that, without the stimulus, the economy would have lost approximately 5.5 million jobs overall, or 2 million more than the actual 3.5 million jobs lost. With some tweaks to their internal economic models, the White House has defined success so far downward as to claim 3.5 million job losses a good thing. They estimated the stimulus to be 2 million jobs strong in it's first year, and are sticking to it by claiming the original "without stimulus" numbers were inacccurate. When analyzing the new estimates, it becomes clear that the "it would have been worse" argument is completely and totally unprovable. In addition, the White House report does not actually share its specific economic model, leaving the reader to take their word that the baseline economy would have performed so much worse without the stimulus spending. The White House's admission that last year's economic models were so far off should not inspire confidence in this year's economic models.
With that in mind, the White House dispatched Cabinet members and Vice President Joe Biden to 35 communities across the country to promote programs funded by the stimulus. (It's a political necessity. As with previous instances of high unemployment, the public's skepticism poses a threat to the president's party in Congress. In 1982, with unemployment above 10 percent and Ronald Reagan in the White House, Republicans lost 26 House seats.) Biden issued a glowing first-year report, and the president declared, "We have rescued this economy from the worst of this crisis." In an e-mail to Obama's vast network of presidential campaign supporters, his former campaign manager, David Plouffe, boiled down the pitch: "On the first anniversary of the stimulus package, job losses have seen a reversal of the trend experienced in the last year of the Bush administration." It's a simple and effective political message, even though many economists say the financial sector rescue initiated by the Bush administration and the actions taken by the Federal Reserve are dominant factors in preventing the complete and total economic collapse from occurring.
With overwhelming public disapproval of the stimulus, the White House is left pleading for some patience.
"We've only been halfway through the act," Biden said. "The job-creating portions are really loaded in the second half."
That would seem to conflict with the prepared testimony of Christina Romer, Chair of the White House Council of Economic Advisors, delivered before Congress on October 22, 2009. When she dropped this bombshell:
“Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009. By mid-2010, fiscal stimulus will likely be contributing little to growth.”
The stimulus was designed to jump start the economy through job creation, job retention, job retraining, tax rebates and unemployment benefit extensions. It had three basic parts: transfers to state governments, a tax rebate, and infrastructure spending. The best you can say of the stimulus plan is that it prevented state, local, and municipal governments from firing heavily unionized public sector employees during a recession. In an email to supporters, former Obama campaign manager David Plouffe credited the stimulus with slowing the rate of job loss over the last year. The tax rebate was meant to spur consumption, despite Obama's rhetoric that American consumers need to spend less and save more. In any case, the tax rebate failed, just as prior tax rebates have failed, from Jimmy Carter's to George W. Bush's.
Out of the $787 billion of the stimulus, roughly 60 percent goes to individuals in temporary tax rebates and increased entitlement spending. Most of it hasn't gone out the door. The government has spent just one-third of the stimulus money so far. The program is to continue pumping federal money into the economy into 2011. This is not what you would call "timely, temporary, and targeted." These programs had little chance of creating the demand the economy needed for increased employment. History shows that people will only spend 20 percent to 40 percent of a temporary tax rebate, for the very good reason that they know it’s temporary. Temporary tax rebates do not instill the higher level of confidence required to boost consumer spending! And those recieving the increased entitlement spending are unemployed... hanging at the end of their rope!
At first, I believed the administration genuinely believed, against all historical experience, that government spending would lift us out of recession. And it knew it had to project an unrealistically rapid, robust economic recovery, because otherwise the already-horrid deficit projections would have looked even worse. So Obama talked up the crisis to get the stimulus passed, and after that . . . happy days are here again! It was at that point, when I realized the president was not as ignorant as he pretends. He knows fear during a time of crisis can be used to his political advantage. And, he knows, consumer confidence, more than stimulus, is the key to economic recovery. (The one thing Roosevelt got right was his "The only thing we have to fear...is fear itself" statement) Stimulus spending itself is nothing more than politicians taking advantage of a bad situation to push a political agenda under the guise of economic policy.
- Many states and local governments owe their fiscal survival to the stimulus. But now, those governments are scrambling to find ways to fill the holes in the coming year.
The stimulus provided more Medicaid health benefits, unemployment checks, food stamps, tax rebates and other relief to many crippled by the tough economy. In fact, the expanded benefits led congressional budget analysts to increase the overall cost of the stimulus by $75 billion. The program also allowed states and local school systems to hold onto hundreds of thousands of teachers, school workers, police officers, and firefighters who might have been let go but for the extra federal money. The single greatest count of jobs saved under the stimulus goes to school employees whose jobs were threatened by deep deficits in local and state budgets.
- Thousands of road and bridge projects broke ground with stimulus money, helping to keep the anemic construction industry afloat. But job losses still were significant, with as many as one in four construction workers unemployed.
Obama's promise of a better infrastructure remains at least partially unfulfilled. Last year, he said stimulus spending would pay to "remaking the American landscape" with new highways, bridges and transit that "will bring real and lasting change for generations to come." But much of the 12,500 transportation projects nationwide funded with stimulus money last year went to paving existing roads and repairing bridges that were not among those in the worst shape. State transportation officials described them as necessary projects, but the initiative doesn't live up to Obama's claim that his infrastructure spending compared to President Dwight D. Eisenhower's mammoth Interstate building program of the 1950s.
When Obama launched it last year, he cast the program as bigger and better than just an ordinary jobs bill. The program, he said, would provide lasting public works projects, improve education, save ailing state and local governments, offer relief to millions devastated by losing their jobs and homes and help provide much-needed health care. Despite the broad range of those promises, and evidence shows that at least some of them have been kept, Obama's stimulus will forever be judged by jobs and real economic growth. Jobs and economic growth that can only be created, long term, by the private sector. In short, he set himself up for failure.
A recent paper by economists John F. Cogan, Tobias Cwik, John B. Taylor, and Volker Wieland shows that the White House's economic models, used in January 2009, were primitive and outdated. Even if one accepts the controversial Keynesian theories that have been used to defend the stimulus, the authors state that the White House economic team used inaccurate "old Keynesian" models that use absurd interest rate assumptions and do not correctly factor how people and businesses react to adjustments in economic policy. The authors claim that the more evolved "new Keynesian" models project economic growth and jobs stimulus one-sixth the size of those propagated by the White House last year. A White House CEA study claims that $263 billion in stimulus spending has created 2 million jobs and added approximately 2.5 percent to the economy. Virtually all Keynesian models are based on simple multipliers assuming that every dollar of new deficit spending grows the economy by pre-determined figure. Since the economy actually lost 3.5 million jobs and contracted by 2.3 percent, If these old Keynesian models were off by a factor of 6, and the CEA study claims were correct, this suggest that the economy would have lost more than 11 millions jobs and contracted by more than 12 percent without this "infusion" of economic stimulus. That is simple nonsense. If the Cogan-Cwik-Taylor and Wieland paper is correct, we can therefore conclude that the White House is basing its performance numbers on multipliers that are way too large. (Possibly 6x too large) It is more likely that the jobs created and the stimulus growth numbers are incorrect, possibly as low as 380,000 jobs and 0.6% GDP growth.
Truth is, things really could have been worse. While Republicans say the stimulus was too big, liberal Nobel Prize winning economists like Paul Krugman and Joseph Stiglitz say it was too small and too focused on tax cuts rather than job creation. With 14.8 million unemployed and a record 3.9 million foreclosures in 2009, author and liberal economist Jack Rasmus, says its clear Obama didn't aim high enough. Rasmus, who is somehow permitted to teach economics at St. Marys College and Santa Clara University in California, said the stimulus needed to be about $2 trillion. Last year, Rasmus sent a proposal to the House Financial Services Committee calling for $1 trillion on job creation and $1 trillion in direct lending to homeowners and small businesses through a small business loan corporation similar to a Depression-era program established by President Franklin D. Roosevelt. The absurd programs would be paid for by raising the income tax to its 1980 level of about 50 percent for top bracked income, it is currently about 36 percent, and the capital gains tax from the current 7 percent to about 15 percent. (instead of a jobless recovery, causing a growthless, socialist recovery) Rasmus said Obama has failed to recognize that the worst recession since the Great Depression requires extreme measures. "The government can pump money into the states through unemployment insurance, but that just keeps things from getting worse," Rasmus said. "Obama's going to have to realize that this isn't 1994, and if he doesn't act like FDR in 1934 he's going to end up like Jimmy Carter in 1978." (Obviously, someone needs to inform Rasmus of FDR's repeated economic failures)
Most economists, including many on the political left, know that stimulus will only work if the amount of actual stimulus exceeds the damage done by additional deficit spending, and the very nature of a compromise bill is that it makes trade-offs which reduce the focus of the bill and increase the cost of the bill. Even extreme left-wing econoclown Paul Krugman acknowledged this result from too much compromise, commenting that the compromises in the bill will "lead to substantially lower employment and substantially more suffering."
Keynesian economic theories of all types have been repeatedly disproven. The repeated failure of government spending stimulus programs shows that governments cannot spend their way out of a recession. Every dollar Congress injects into the economy must first be taxed or borrowed out of the economy. No new purchasing power is created; it is merely transferred from one part of the economy to another. For instance, the government's Recovery.gov Web site claimed that $200 billion spent from the stimulus had financed 640,000 jobs. Even if that is true, the private sector now had $200 billion less to spend, which--by the same logic--must lose the same number of jobs, leaving a net jobs impact of zero. But this single-entry bookkeeping simply ignored that side of the equation. A recent directive from Office of Management and Budget Director Peter Orszag instructed staff tracking stimulus spending to replace the term "jobs saved or created" with "jobs funded." This allows for the reality that stimulus spending does not create additional net jobs but rather funds the redistribution of jobs from one part of the economy to another.
Some respond that people are saving instead of spending, and government spending is therefore needed to unlock these savings. But redistributing money from savers to spenders does not add new demand, because savings do not fall out of the economy. It is money either invested or deposited in banks, which then lend them out to others to spend. Even if recession-weary banks hesitate to loan money, they invest it in Treasury bills instead. They do not hoard customer deposits in massive basement vaults. (unless directed to do so by federal bank regulators) One person's savings quickly finances another person's spending. Consequently, all income is applied somewhere in the economy, regardless of whether it is spent or saved. Removing water from one end of a swimming pool and pouring it in the other end will not raise the overall water level--no matter how large the bucket. Similarly, borrowing money from one part of the economy and redistributing to another part of the economy will not create new growth--no matter how big the stimulus bill. Thus, it is no surprise that the stimulus has failed to effectively create jobs.
So the problem is that Obama's claim that spending is stimulus is fundamentally incorrect. Government spending is not inherently stimulating to the economy as he suggests because government cannot just create money from nothing without consequences. Where does that money come from? It either has to come from tax revenue, printing money or from deficit spending. If it comes from taxes, all it amounts to is a redistribution of wealth from the top 50% who actually pay taxes to the bottom half who pay little or no taxes. That's fine as far as helping the most vulnerable citizens out in the short term, but it doesn't produce any stimulus because it's just moving money around without growing the overall economy. If it prints more money or borrows money (deficit spending), the money has to come from somewhere, and the process of getting that money automatically undermines any benefit of spending it. Not 100%, but enough to make a sizable difference. For a stimulus bill to work, it would have to either provide enormous amounts of cash-in-pocket to individuals so that the decline in the value of that cash caused by monetary deflation and price inflation would be more than negated. Or, it would have to cause massive job creation and increase economic productivity, to offset the money being spent, with growth in GDP and additional tax revenue.
If the spending is financed by printing or borrowing money it might have more of a stimulating effect, except that whatever you put into the economy this way gets added to the money supply or the deficit, causing inflation and devaluing the currency. That inflation/devaluation effect may lag behind whatever stimulus you create, but will eventually catch up and negate it. So you ask, how much will spending $800 billion of deficit dollars hurt the economy? Well, on the most simple level, $800 billion is about 7% of the projected GDP. Theoretically that could translate into about an equivalent percentage of increase in inflation and decrease in the value of the dollar, but it would probably be less because it would be somewhat offset by whatever stimulus it actually caused and whatever increased tax revenue was derived from it. We can already see the effect of deficit spending during the Bush years in the form of a seriously deflated dollar.
Contrary to the argument made by many Republicans, tax rebates aren't the answer either. They are equivalent in many ways to the kind of social welfare spending. The problem with tax rebates is, when you rebate tax dollars, that just means that money has to be found somewhere else, which means more deficit spending and printing of bogus money to contribute to the deflationary spiral. Yes, it's true that tax revenue does, has, and will increase from the economic growth it inspires, but it would need to be a marginal tax rate cut over a period of years, not a rebate of a couple years, to inspire anything of real stimulus, and the tax revenues over that period may still cause deficit or debt issues overall, depending on the depth of the recession, strength of the recovery, and the timing of the economic cycle.
Just creating bogus money and passing it around won't do the job. Spending is not stimulus when you don't have the money to spend. The is only answer way to create economic growth without spending government money it does not have. A strong leader, who could calm the populus and boost the consumers confidence, could actually create spontaneous GDP growth. People will spend money instead of hoarding it as they usually do in response to a an economic crisis. Spending a few billion on a inspirational propaganda campaign might be more cost effective, and do more good, than an unpaid stimulus bill. But it would require a leader with the gift for gab, someone who challenges the American people like John Kennedy, charms them like Bill Clinton, or inspires them like,.....well,..... like Obama used to.
Now the White House economic team has their work cut out for them. The Obama stimulus is falling victim to the same inefficiencies, false promises, waste and fraud as all the other government spending programs. The stimulus has failed to energize the economy, and, it has become an object lesson for the all in the limits of big government. More importantly, it has caused a decisive swing in public opinion to the right. That may turn out to be the most beneficial legacy of this foolish spending bill.
-The Conservative
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