Stimulus Revisited

In the latter part of last week the government delivered a triple dose of discouraging economic news.

On Thursday, the Offices of the Inspectors General published data detailing how the Obama Administration’s $787 billion stimulus package (the American Recovery and Reinvestment Act of 2009) is being implemented. The figures show that Federal contracts awarded under the stimulus plan have so far saved or created a meager 30,383 jobs, at an apparent costs of $528,000 each. The same day, the General Accounting Office published its Fall 2009 Update of the Federal Government’s Long-Term Fiscal Outlook. The report projects that within ten years the U.S. public debt, measured as a percentage of GDP, will have exceeded the record high level of 109% reached in 1946, and will continue to climb steadily thereafter to 200 percent and beyond. The GAO concludes that the “long-term fiscal outlook remains unsustainable”. The following day brought confirmation from the Department of the Treasury and the Office of Management and Budget that the Federal deficit for the 2009 fiscal year, which ended on September 30, 2009, was a record $1.417 trillion. This news came on the heels of reports that the Administration and Congressional Democrats are considering further  tax cuts and additional spending to jump-start the economy and, in particular, reverse the continuing rise in unemployment.   Before even thinking about additional spending or tax cuts that would add to record deficits, the Administration needs to take a very critical look at what its original measures have accomplished.

First, though, a quick economic retrospective. In their statement announcing the deficit for FY 2009, Treasury Secretary Tim Geithner and OMB Director Peter Orswag were predictably quick to blame George Bush, asserting that the deficit for FY 2009 “was largely the product of the spending and tax policies inherited from the previous Administration, exacerbated by a severe recession and financial crisis that were underway as the current Administration took office.” Given his prior position as Chairman of the Federal Reserve Bank of New York, Geither is not in the best position to point fingers, but he is right nonetheless. There can be no question that the prior Administration’s reckless (or perhaps simply clueless) economic and fiscal policies were major drivers of the current crisis.

The final four budgets of the Clinton Presidency (including “off budget” receipts and outlays) were in surplus, with Bush inheriting a budget surplus of $128 billion for FY 2001 and a national debt, as of the end of the fiscal year, of $5.8 trillion - 57.4 % of gross domestic product. By the time Obama took office, the debt had ballooned to $10.6 trillion, or roughly 90% of GDP, a higher percentage than any year since the aftermath of World War Two. Part of the increase is attributable to fiscal policy; Bush resorted to discredited “trickle-down” theories to justify irresponsible tax cuts that benefited primarily the wealthiest Americans. Citizens for Tax Justice, a non-partisan tax research group, recently estimated that the Bush tax cuts will have added more than 2.48 trillion to the deficit by the time they expire in 2010, with over one quarter of that amount flowing into the pockets of the 1 percent wealthiest taxpayers. The estimated cost for 2009-10 alone, is $640 million.

In the waning months of his Presidency, Bush and Treasury Secretary Henry Paulson presided over the ill-conceived Troubled Assets Relief Plan (TARP) a panic-driven over-response to a crisis resulting in large measure from the Bush Administration's own lax and complacent approach toward regulating Wall Street. Total commitments under TARP now exceed $450 billion - nobody seems to know for certain what the final tab will be. The trade balance also deteriorated sharply under Bush, as the domestic manufacturing sector declined; the balance of payments deficit, which stood at 380 billion in 2000, had grown to 696 billion by 2008.

Bush’s fiscal and economic policies also widened the gap between rich and poor. Seasonally adjusted unemployment rates rose from 4.2 percent in January 2001, when he assumed office, to 7.6 percent in January 2009, when he left. During the Clinton Presidency, annual average civilian unemployment rates fell each year; under Bush, the rate rose or remained flat during 5 out of eight years. Under Clinton, the percentage of the "working poor" (the proportion of people in the workforce for at least 27 weeks during the year who live below the poverty line) declined steadily; under George W. Bush, the rate rose again. A 2008 OECD report found that the United States had the highest poverty rate and highest income inequality rate of any OECD nation save Mexico and Turkey. The earnings gap in the U.S. widened by 20 percent during the latter part of the decade and social mobility remains less than in other developed nations. These are shameful statistics that demonstrate why, for the vast majority of poorer Americans, the “American Dream” will remain just that. If there is any economic or socio-economic metric under which George W. Bush does not rank as the worst President in living memory, I have yet to see it.

Republicans Congressional lawmakers who presided over this descent into economic chaos have now reinvented themselves as “deficit hawks”. The voted en masse against Obama’s initial $787 billion stimulus and are lining up to oppose Round Two, should there be one. But that is the question; should there be one? My answer is no – not because I don’t believe in the virtues of fiscal stimulus, but rather because I don’t trust the current Administration or Congress to get it right. They certainly didn't first time around.

The first stimulus package was sold to the American public as a plan that would put people back to work quickly. We heard a lot about “shovel-ready” projects that could be implemented within weeks of funds being allocated. Proponents invoked memories of Franklin Roosevelt’s great public works projects that helped lift the nation out of recession in the 1930s. And so it could have been in 2009, had the funds been carefully targeted and promptly deployed. The stimulus package provided a rare opportunity not only to create much needed jobs, but also rebuild roads, bridges, public buildings and public housing that are crumbling from years of neglect, the result in part of states deferring non-essential maintenance in order to balance budgets. In the short-term, infrastructure projects create well-paying jobs in the construction sector and boost demand for steel, cement, asphalt, lumber, heavy equipment and the like. They also serve obvious broad societal benefits that endure for years - we all get to drive on better roads, travel on new and faster trains, enjoy better public facilities or have a better place to live. We were also told that stimulus funding would be targeted toward “green” industries, spurring the creation of cutting-edge environmental technologies that would provide long-term economic and social benefits to the economy in the long term, as well as much-needed jobs in the short term. That also sounded pretty exciting. So what actually happened?

The first problem is that, as eventually enacted, the Obama stimulus plan owed as much to Ronald Reagan as to John Maynard Keynes. The $787 billion is made up of tax cuts ($288 billion), government grants, loans and contracts ($275 billion) and entitlements ($224 billion). I don't believe that tax cuts are an effective stimulus, at least in the short term. At the individual level, reducing someone’s taxes by a few dollars a week provides an immediate benefit only to those that already have jobs; reductions in personal income tax create new jobs only if the recipients of the tax cuts spend that additional money on goods or services that originate in the U.S. In times of economic uncertainty, recipients are more likely to use the additional cash to bring their mortgage up to date, pay down their credit card balances or simply save the money, rather than recycle it back into the domestic economy. Even if some do increase spending – on a new TV or cell phone, for example - the likely beneficiaries will be in China, Taiwan or Mexico, where the goods are likely to have been manufactured. The most effective measure Congress could take in terms of tax policy is to repeal the Bush tax cut - or at least stand firm against attempts to extend the cuts after their scheduled expiration date in 2010. But many Congressional Democrats, like their Republican counterparts, can’t seem to resist the temptation to try to buy votes with tax cuts. With the mid-term elections approaching, it is almost inevitable that if Congress gets its hands on another stimulus plan, the result will be more tax cuts that will increase the deficit without providing an offsetting economic stimulus.

The second problem with the initial stimulus plan is that it is unfocused; the $787 billion is spread around 28 Federal agencies and organizations, some of which by their very nature can do little if anything to stimulate the economy. Moreover, much of the funding is not allocated to specific purposes and disbursement is left to broad agency discretion. For example, the Department of Health and Human Services (which is the biggest conduit for stimulus funds, with $122 billion at its disposal) has announced that it will spend up to $650 million for chronic disease prevention - a worthwhile goal no doubt, but the agency’s press release announcing the program doesn’t even attempt to explain how this will provide economic stimulus. Or how about the Department of Education, which was given $100 billion to spend on education funding, college grants and tuition tax credits? $40 million of this is to be doled out to states as “stabilization funds” to help avert education cuts and to promote education reform (whatever that means). Don’t get me wrong – I’m all in favor of increasing funding for education, but the fact is that these expenditures will create virtually no new jobs. The Department of Agriculture plans to allocate most of its $52 billion (which includes various loan guarantee programs) to nutrition assistance ($21 billion) and rural community development ($27 billion). The list goes on and on, with little indication of how these programs will spur employment. In fact, the biggest job creation may be on K Street, as would-be beneficiaries of “stimulus” funding call their lobbyists and lawyers to find out how they can cash in.

Perhaps unsurprisingly, it seems that most agencies are struggling to come up with ways to spend the huge amounts of tax dollars that have been shoveled into their coffers. As of October 8, only 22 percent of the initial $787 billion stimulus had been paid out, and only 17 percent of the portion allocated to grants, loans and contracts had actually been disbursed. The Department of Transportation, charged with overseeing grants to fund major infrastructure projects, has paid out less than 10% of the $45 billion allotted to it. But of perhaps greater concern is the fact that, according to the most recent government data, the $16 billion so far allocated to Federal contracts has created or saved only 30,383 jobs; this translates to an average cost of $528,000 per job. Further data showing the job creation effects of grants and loan guarantees are due at the end of this month, but what we have seen so far does not provide grounds for encouragement.

I had a certain sense of deja vu when I read recently that the Administration may be weighing a second round of spending targeted specifically at transportation and infrastructure. Isn't that what the original plan was supposed to have done? The Administration seems to believe that the sluggish response to the first stimulus package justifies more of the same. I suggest the contrary is true, and that before considering spending an additional penny, Congress and the Administration need to provide voters with a better accounting of how the existing funds are being used to create jobs, freeze further disbursements on wasteful programs that will not stimulate the economy and re-allocate those funds to more productive use. $787 billion is more than enough stimulus, if it is used properly.