Fundmastery Blog

Kurt Brouwer July 1st, 2009

It’s safe to say that, in order to be effective as economic stimulus, any plan needs to stimulate the economy now, not a few years from now. That is, to be beneficial, the stimulus has to come very quickly, while the recession is still in effect.

And, secondly, the stimulus has to go to activities that contribute to economic growth and produce permanent jobs.

Third, the stimulus has to go away pretty quickly too so that we do not have lots of highly inflationary government spending coming along when the economy heats up in 2010 and 2011. Therefore, the stimulus has to be:

• Timely
• Targeted
• Temporary

Unfortunately, the economic stimulus program underway does not get high marks in any of the three categories as this piece from Bruce Bartlett points out [emphasis added]:

Why Isn’t the Stimulus Stimulating? (Forbes, June 26, 2009, Bruce Bartlett)

…As I warned in a January column, it takes far more time for it to impact the economy than most people think. Moreover, not all government spending is necessarily stimulative, and the parts of the stimulus package that provide real stimulus are among the slowest to come online.

Congressional Budget Office Director Douglas Elmendorf recently presented a report to the International Monetary Fund in which he walked through some of the problems with implementing the stimulus program.

First of all, 60% of the stimulus package was never going to have much of a stimulative effect. These were programs like extending unemployment benefits and tax credits with no incentive effects that may have been justified on the merits, but don’t really do anything to increase growth or reduce unemployment.

OK.  So 60% of the stimulus never had much of a stimulative intent?  That would have been nice to know during the initial debates on the bill, wouldn’t it?

For a program to be stimulative, it must bring forth economic activity that otherwise would not have taken place. The classic example is public works. When a new road or bridge is built, construction companies have to purchase concrete, steel and other materials that create business for other companies. They also employ workers that otherwise would not be working, paying them wages that they will spend, producing jobs and incomes for other workers.

If this works the way it is supposed to, stimulus spending has a multiplier effect throughout the economy. A Council of Economic Advisers study estimated that government purchases of goods and services raise the gross domestic product by $1.57 for every $1 spent. By contrast, tax credits and income transfers are much less stimulative, raising GDP by considerably less than $1 for every $1 rise in the deficit.

…According to Elmendorf, by the end of fiscal year 2009, which ends on Sept. 30, about a third of the least stimulative spending will have been spent vs. only 11% of the highly stimulative spending.

Even at the end of fiscal year 2010, we will have spent only 47% of the highly stimulative spending. By the end of fiscal year 2011, more than a quarter of the stimulative spending will still remain unspent.

In other words, long after the recession has ended, we still will not have spent as much as 50% of the 40% of the economic stimulus package that could actually stimulate anything.  Let’s see: 50% of 40% is 20%.  So, of the entire stimulus package, only about 20% of the highly stimulative stuff will have been spent by October 2010.  Wow.

…Even the simplest public works projects such as road repaving take months to get moving from the time a federal check arrives. And in the short run such small projects have very little stimulative potential because state and local governments will simply use the workers and materials they already have on hand to do the work.

Information compiled by the Obama administration confirms the slow pace of federal stimulus spending. According to Recovery.gov, the main government Web site tracking stimulus spending, contracts worth $152 billion had been let as of June 19. However, of this amount only $53 billion has actually been spent in the four months since the stimulus bill was enacted.

When one looks at some of the detailed accounts, the numbers are even more dismal. The Department of Transportation, for example, has only spent $369 million of the $19 billion it has made available for highways, airports and other construction projects.

And remember that “spent” means only that the Treasury has cut a check to some state or local government. It doesn’t necessarily mean that any workers have been hired or new economic activity generated. It could still be months before the money that is already out the door has a meaningful impact on jobs or GDP.

…Some years ago, I did a study of every anti-recession program in the postwar era. I found that they invariably impacted on the economy too late to really help. There were many reasons for this. First, economists were slow to see a recession coming and often didn’t see one at all until we were already well into it.

Then it took time to convince policymakers to do something and get legislation enacted. By the time a countercyclical program was signed into law, the recession was always over. Consequently, the stimulus stimulated when the economy was already on the upswing. The result was that these programs stimulated inflation more than they stimulated jobs and growth.

Many years ago John Maynard Keynes warned against using public works for stimulus for precisely this reason–they are too hard to reverse once the need for them has passed. With many economists already warning about inflation coming back in the near future, the ultimate legacy of the stimulus bill may be to make it harder to tighten fiscal policy when it will be needed.

The good news is that we passed a stimulus bill during the recession. Normally, as the following chart demonstrates, we usually do so only after the recession has ended. However, the economists point out that most of the spending in the American Recovery and Reinvestment Act of 2009 is delayed so long that is unlikely to actually do any good for lifting us out of the recession.

This table is from a piece in the New York Times by Bruce Bartlett, also the author of the piece linked above. The table gives the historical timing of government stimulus programs compared to the timing of a given recession:

Source: New York Times

The fine print of the various programs given above is a bit hard to read, but the point is pretty clear. In almost all cases, the government stimulus program was enacted at the tail end of the recession or even after it had ended.

In the piece linked above, Bartlett wrote [emphasis added]:

The history of anti-recession efforts is that they are almost always initiated too late to do any good. This chart, based on recession timelines from the National Bureau of Economic Research, shows the enactment of stimulus plans is a fairly accurate indicator that we have hit the bottom of the business cycle, meaning the economy will improve even if the government does nothing…

See also:

Stimulus: Is it timely, targeted and temporary?

Feldstein: Weak & Wobbly Economy Ahead

Government Debt Tsunami

• Business , Economy , Geopolitics , debt , income taxes
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