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FORGET ME NOT: ASSESSING THE IMPACT OF
THE STIMULUS BILL, AT YEAR’S END
By: Thomas Galvin
11/20/2009
“There are three kinds of lies: lies, damned lies and statistics”
-Mark Twain
The American Recovery and Reinvestment Act (the “Stimulus Bill”) has provoked hackles of criticism, been a catalyst for hope and the focus of an endless series of debates. Everyone agrees it has been a political football; hailed by supporters as saving the economy from further ruin and derided by opponents as the latest government boondoggle that has wasted taxpayers’ money. However, the gains and failures of the stimulus bill have been lost in the partisan bickering. The bill was signed into law with the purpose of lifting America out of its worst economic recession since the early 1980s. It was intended to pump money into ‘shovel-ready’ projects, create jobs, save jobs, provide a safety net for social programs, keep states afloat, provide targeted tax cuts, and help new industries gain footing in a treacherous economy. This article will examine what the stimulus has accomplished and failed to achieve. It will also highlight the new ideas being offered to help the staggering economy recover in 2010.
THE GOAL: JOBS
The White House Council of Economic Advisors (CEA) must present Congress with quarterly reports on the effects of the Recovery Act. The Council must address economic activity, especially employment figures. This month, the CEA presented a report that details the first six months of the bill’s effects. Future reports will detail job retention and creation, but this report estimates job figures from a variety of ways. The Recovery Act provided for $787 billion of funding as a fiscal stimulus to pull the economy out of a tail-spin.
Economist Mark Zandi has noted, “It is important to note that estimating the economic impacts of the fiscal stimulus is not an accounting exercise… It is not feasible to identify and count each job that results from stimulus.” Understanding this caveat, the Council estimates that the Stimulus bill has added 2 to 3 percentage points to real GDP growth in the second quarter of 2009. The estimation is that 300,000 to 500,000 more jobs existed than if the Recovery Act had not been enacted.
The Council noted, “By August, two-thirds of the way through the third quarter, employment is estimated to be between 600,000 and 1.1 million higher than it otherwise would have been.” Obviously the United States is still enduring a recession. Real GDP fell at a 1 percent annual rate in the second quarter and employment declined by 216,000 in August. The CEA contends “these declines in output and employment would have been significantly worse in the absence of fiscal stimulus.”
At the end of August, $151.4 billion of the original $787 billion had gone to American taxpayers and businesses in the form of tax reductions. An additional $128.2 billion in obligations was for recipients once they make expenditures. Fiscal support for the fifty states constituted one-quarter of ARRA funding. This measure, according to CEA, successfully increased employment at the state level relative to the “no-stimulus” baseline.
The stimulus plan provides for $507 billion in spending and $282 billion in tax relief. Projects for public works involving highways, bridges, schools, tunnels, museums and office parks, account for $200 billion. The bill includes $115 in education, $87 billion for Medicaid, $50 billion for energy, $40 billion for unemployment benefits and $14 billion in cash grants to the elderly.
THE GREATEST IMPACT: SCHOOL JOBS
The New York Times noted in late October, “The best symbol of the $787 billion federal stimulus program turns out not to be a construction worker in a hard hat, but rather a classroom teacher saved from a layoff.” Of the 640,239 jobs the Obama administration claimed were created or saved, 325,000 were in education. Most were teachers’ jobs that states were able to save because of the infusion of stimulus money. About 80,000 of the jobs, that are claimed to have been created, were in construction.
More construction projects are due to get underway in 2010. In Florida, a huge infrastructure project is planned to build the Indian Street Bridge in Martin County. California governor Arnold Schwarzennegger said more than 100,000 jobs were created in his state. Of those, more than half (62,000) were for teachers, professors and school administrators.
James Hagerty and Jon Hilsenrath wrote in the Wall Street Journal that “The U.S. economy would have turned in a far worse performance in the third quarter without help from the federal government. Now the question is whether growth can continue without that support.”
More than one percentage point of GDP growth came from care sales due to the highly publicized Car Allowance Rebate System (“Cash for Clunkers”) program. Car sales surged to record levels in July and August, but plunged 10.4% in September.
The CEA claims the “trajectory of the economy changed materially toward moderating output decline and job loss. The decomposition of the GDP and employment change by components or sector suggests that the ARRA has played a key role in this change of trajectory.”
The Council’s analysis is that roughly 2.3 percentage points of real GDP can be attributed to the stimulus package. “We estimate that the Act has had particularly strong effects in manufacturing, construction, retail trade and temporary employment services.
EXPERTS WEIGH IN
The New York Times assembled four economists to discuss “Did the Stimulus Work?” Jeffrey Miron of Harvard University, Simon Johnson of MIT, Mark Thoma of the University of Oregon and Russell Roberts of George Mason University weighed in with their thoughts.
Miron believes that the Federal Reserve’s monetary policy, placing interest rates near zero, was probably the major reason why GDP has begun to increase. He asserted that tax cuts are better at providing “stimulus” than spending increases.
Johnson, previously the chief economist of the IMF, testified before the Joint Economic Committee on Congress on the stimulus. Johnson believes “The fiscal stimulus played a decisive role in reducing the depth and pain of the recession and is now helping to get a recovery under way.” Johnson asserted that that “a generalized collapse in production and employment brought on by a financial panic” necessitated a stimulus package of discretionary funding.
Thoma thinks that ARRA is off to a “shaky start.” Now that cash-for-clunkers has expired, he doubts the sustainability of output growth. However, Thoma believes the stimulus bill should go farther. “One of the big dangers we face is that we will declare victory too soon and begin raising interest rates and cutting back on stimulus before the private sector has recovered the ability to sustain growth without help from the government. I believe that we need to put additional stimulus in place to maintain the growth we are seeing, particularly given that the lagging recovery in employment. But with worries about the growing deficit and fears of inflation, more stimulus is a political non-starter. At the very least, we have to maintain the stimulus that is already in place.” Thoma noted at the growth rate during the recovery of past recessions was 6 to 7 percent.
Roberts lamented that two-thirds of the money spent on “stimulus”, so far, have gone for social welfare programs while the Department of Transportation has only spent $4 billion of the $30 billion it was allocated. Roberts believes the biggest criterion is regaining the confidence of consumers.
COMPLAINTS
Critics have complained that the claims of jobs created or saved do not add up because of flawed record keeping. The administration deleted 60,000 jobs from its list after news broke that the job numbers were overstated. In fact, the government claimed $761,420 in spending created 30 jobs in Arizona’s 156th Congressional District – a district that does not exist.
Wisconsin Democrat, David Obey, House Appropriations Committee Chairman said “the inaccuracies are outrageous. We designed the Recovery Act to be open and transparent… Whether the numbers are good news or bad news, I want the honest numbers and I want them now.”
Claiming a job has been “saved” has created the most consternation. The government admirably tried to create a transparent system. But, how can one definitively figure out that a job would have been lost without stimulus money? If someone benefited from stimulus money for a few months, should that count? Gary Bass, head of the watchdog group, OMB Watch, said “I would not have framed it as a jobs bill or a jobs law, as they have done.” He felt that offering clear reports on how the money was spent, instead of trying to provide actual job tallies, would have been more informative and reliable. ABC News found 700 mistakenly credited congressional districts. Problems in reporting were also found in real districts. Obey was outraged when he found out a sewer project in his district was listed as creating 100 jobs when the real number was five. Obey said, “I wanted to strangle somebody.”
Despite the ARRA’s best efforts, there are still some pessimists out there. David Rosenberg, former chief economist for Merrill Lynch predicts the unemployment rate is going to hit 12%-13%. He warned, “There are serious structural issues undermining the U.S. labor market.” That is because of “the record number of people (nine million) who were furloughed into part-time work” in addition to those who have dropped out of the labor market. Jan Hatzius, chief economist at Goldman Sachs and Nouriel Roubini, a professor at NYU, think that unemployment could go past 11%. Notably, Rosenberg pointed out that “the unemployment rate is going to very likely be making new highs long after the recession is over.” However, Joseph LaVorgna, chief U.S. economist at Deutsche Bank told clients that unemployment could peak in 2009 and start to fall in 2010. LaVorgna said, “the peak in unemployment duration as measured by the number of people employed between 5 to 14 weeks is an excellent leading indicator of the labor market. In the past, this series peaks one quarter ahead of the unemployment rate. If history repeats, the unemployment rate should peak this quarter.” In early November, President Obama signed legislation into law Friday providing up to 20 weeks of additional unemployment benefits. The maximum a person can receive is now up to 99 weeks, the most in history.
NEW IDEAS
There is no shortage of ideas being offered to bolster the Stimulus bill’s requirements. There are calls for a second stimulus, new tax cuts and targeted tax credits. Alan Blinder discusses a tax credit for new jobs and direct public-service employment in the Wall Street Journal. He said that the tax credits are prone to abuse and no one should want a bigger payroll but evoking the phrase, desperate times call for desperate measures, he said, “In deep recessions, sensible government do things they would never do at full employment.”
Blinder wants to make sure the public sector is not interfering with private enterprise. “Direct public-service employment is straightforward. As long as the new government jobs do not compete with the private sector, the net job creation should be one-for-one. So hire people to repair parks, not shopping malls. And if we restrict ourselves to low-wage jobs, the cost will not do grievous harm to the budget. “ As for the tax credits, Blinder said there are two advantages. Every job would be in the private sector and it would blunt criticism of a “socializing” of the labor market. Blinder is worried about employers “gaming” the system. He surmises, “First, lots of jobs that would have been created en without the tax credit would receive the credit anyway. For those jobs, there is no bang, only bucks. Second, by increasing the demand for labor, the tax credit will drive up wages (which is nice), which will in turn kill some jobs (not nice).” Firms could exaggerate the number of new jobs created in order to receive the tax credit. “One is tofire Peter and hire Paul. This problem can be fixed by awarding the tax credit only for net increases in headcount above, say, last year’s base. A second gimmick is replacing one full-time worker by two half-time workers. That loophole can be plugged by applying the tax credit to total payroll costs, rather than to headcount… The more I dwell on these things, the better direct public-service employment sounds.”
Another stimulus bill could, in fact, be headed our way in 2010. At its panel discussion, “Innovation, Policy and Road to Recovery”, Bank of America analysts said they believe another economic stimulus package could come next year if more jobs are not created. Harold Ford Jr, vice chairman and senior policy advisor said, “Given the lack of jobs in rural and urban settings around the country and the struggle that state capitals are having to balance their budgets, political pressure will rise at the beginning of next year for more stimulus.”
Michael Boskin, a professor of economics at Stanford University, has proposed an alternative stimulus plan. Boskin argues that while this stimulus plan will make a bigger impact – it will be delayed. He supports the proposal to cut the payroll tax by six percentage points (of the 12.4% Social Security component) in order to “increase employment by three million to four million workers – an amount equal to all the job losses since the stimulus bill was passed.” Boskin spells out the five factors hindering jobs growth
- “Continued deleveraging, unresolved toxic assets and weak banks are constraining credit, especially for small business that is the source of most hiring.”
- “Household balance sheets depressed from declines in home values and portfolios are likely to constrain consumption growth.”
- “Government industrial-policy micromanagement with subsidies and mandates from pay to products is forcing noncommercial decisions on wide swaths of the economy”
- “The explosion of spending, deficits and debt foreshadows even higher prospective taxes on work, saving, investment and employment.”
- “The massive liquidity injections by the Fed raise the specter of future inflation.”
Boskin’s solution is that pro-employment policies should concentrate on “disclosure, transparency, effective clearing, capital adequacy and new bankruptcy procedures.” By controlling the costs of entitlements, by indexing Social Security to prices instead of wages and fundamental tax reform that helps businesses grow, he believes those are the ways to make a second stimulus successful.
CONCLUSION
The stimulus bill has had a great impact on the American economy and is one of the most consequential pieces of legislation in our lifetimes. It has created and saved hundreds of thousands of jobs at a time when the national economy is in a precarious state. However, the stimulus bill has not delivered on all its promises. Instead of lowering unemployment, the stimulus bill has been witness to rising unemployment. The politicians in Washington fret over their electoral chances come November 2010, but the American jobseekers have high expectations that the government can get it right when it comes to putting them back to work. Otherwise, many politicians will have to seek a new line of work, themselves.
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SOURCES
“An Alternative Stimulus Plan”, Michael J. Boskin, Wall Street Journal, November 18, 2009
“Another Economic Stimulus Could Come Next Year: Bank of America: - Dow Jones Newswires, November 17, 2009
“How Washington Can Create Jobs”, Alan Blinder, Wall Street Journal, November 16, 2009
“Did the Stimulus Work?”, New York Times Room for Debate Blog, November 1, 2009
“Schools Are Where Stimulus Saved Jobs, New Data Show”, New York Times, October 31, 2009
“Unemployment Extension Adds Up to 99 Weeks of Benefits”, Wall Street Journal, November 6, 2009
“U.S. Unemployment Rate Headed to 12%-13%, Economist Says”, Wall Street Journal, November 11, 2009
“The Economic Impact of the American Recovery and Reinvestment Act of 2009 First Quarterly Report”, White House Council of Economic Advisers, November 2009
“Stimulus Fueled Much of the Expansion”, Wall Street Journal, October 30, 2009
“Cash for Clunkers Helped Economy”, New York Daily News, November 5, 2009
“Lot of Stimulus Money – And Concerns About Where to Put It to Work”, New York Times, October 23, 2009
“Accounting for Stimulus Jobs: Be Careful What You Wish For”, Washington Post, November 18, 2009
“White House Vows to Correct Stimulus Reports”, ABC News, November 17, 2009
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