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Stimulus Plan in Hindsight: Did Obama's Agenda Hobble Economic Recovery?

5 years ago
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America can't shake its recession blues, even if the recession is officially over. The painfully slow recovery is typical in the wake of a financial crisis like the Wall Street collapse, economists say. Still, the hard times are so persistent that I have been feeling twinges of guilt about President Obama's stimulus package.
Many of Obama's ideas for a new economic foundation ended up in that package: expanded broadband coverage, competitive grants for innovative schools, computerized medical records, more science research, more investment in clean energy. I wanted all that, and the stimulus would miraculously make it possible. Using it as a vehicle, we could lay those foundations for growth in the second month of the Obama administration.
But lately I've been second-guessing that rush to turn campaign pledges into reality. The jobless rate has been so high for so long. Was it a mistake to shoehorn Obama's longer-range economic plans into a package intended to jump-start the economy? If that money had been applied to more traditional stimulus, with shorter-term impact, would more people have jobs? Would economists be less concerned about the potential for a double-dip recession?

After talking to five economists, I can give you the bottom line: Spending the money differently probably wouldn't have changed our circumstances much. But the economists took diverse paths to that conclusion, and they have varying opinions about where to go from here.
The $787 billion stimulus package, passed in February 2009, was about one-third tax cuts to people and businesses, one-third aid to states and localities, and one-third Obama's domestic agenda. Many economists and the nonpartisan Congressional Budget Office credit the stimulus with ending the recession last year. Some say the unemployment rate would have been up to 2 points higher without it. But the rate is still high – 9.5 percent in July and the August number, due Friday, may edge higher.
What might have been
A bigger stimulus would have been better, several economists told me. "If there was an obvious problem with it, it was sheer size," said Josh Bivens, an economist at the labor-backed Economic Policy Institute. As for the allocation of the money, he said that given the need for speed and tough negotiations for 60 votes in the Senate, "it was hard to be too disappointed in how it was structured."
Other economists offered wish lists for what might have been. David Madland, director of the American Worker Project at the liberal Center for American Progress, would have liked to see the administration "pour money" into Americorps, Teach for America and caregiver jobs. "The moment for that kind of major investment was right at the beginning," Madland said. "If they had pushed for much greater public service and direct care jobs, I feel pretty certain they would have gotten them."
Mark Zandi, chief economist at Moody's Analytics, said he would have added money for more temporary tax cuts, probably a payroll tax holiday. "We have it now but it's so small it's not very effective. That would have given us a bigger kick," said Zandi, who advised Republican presidential nominee John McCain in 2008.
Zandi called it a mistake to put infrastructure spending into the stimulus bill. "It's good policy and we can use the jobs, but it's not an effective way of getting money into the economy quickly," he said. Nor was spending on Obama priorities such as education and broadband "particularly helpful" in putting money into the economy fast, he told me. "You could make strong cases" that they are good long-term policy, he added, but they aren't effective stimulus and "they also confuse people with respect to what stimulus really is."
Douglas Holtz-Eakin, a former McCain adviser and former CBO director, said the country could have gotten the same economic results from a $300 billion to $400 billion stimulus centered on payroll tax cuts. He agreed that Obama's domestic policy agenda was inappropriate in the stimulus bill. Those programs have to do with "what we want to look like as a nation" down the road, he said, and their merits and costs should have been debated after the financial crisis passed.
Economist Rob Shapiro, a former Commerce undersecretary who advises Democrats, was an architect of the stimulus. He said the Obama campaign asked him what an innovation-driven stimulus package would look like and he outlined pretty much what we got. Does he regret the domestic-policy component? "Absolutely not," Shapiro told me. "Those are still going to be productive long-term investments."
He does regret, however, that the initial stimulus "wasted" money on small-business tax cuts that he says don't work in bad times, and did not include a loan program for homeowners facing foreclosure. The administration instead gave incentives to banks to rewrite mortgages, but Shapiro said very few homeowners were creditworthy enough to get the new loans. Some 1 million foreclosures are anticipated this year and housing prices are expected to continue to decline into 2011. By one estimate, 20 percent of homeowners are underwater – their homes are worth less than their mortgages.
Little change in impact
It's impossible to know whose version of the stimulus would have worked best, but the imperfect one that passed did get the economy growing again, however anemically. The CBO reached that conclusion, as did a Goldman, Sachs analysis and another by Zandi and Princeton economist Alan Blinder. The question is whether a different size or shape of stimulus would have provided a big enough kick to generate a self-sustaining recovery.
The answer is probably not. First of all, most of the stimulus money went out the door quickly, as it was supposed to. Some of the slower starters, such as home weatherization, have caught up. Now the worry is what will happen in the next few months when the stream of federal stimulus slows to a trickle and then stops.
Then there are the external and unforeseeable developments that would have affected a stimulus of any shape or size. This past spring alone, Zandi said, the European debt crisis knocked the wind out of consumer confidence; the Senate struggled over extending unemployment benefits (leaving up to 400,000 people without money to spend for several crucial weeks), and home sales dropped more steeply than expected following the expiration of a homebuyer tax credit.
The overriding problem, Bivens said, was that "the non-recovery act economy just continued to stagnate" over the life of the stimulus. Businesses did not hire enough and bankers didn't lend enough. State and local governments cut back spending and so did average Americans. As Shapiro put it, 70 percent of people own homes and home value has declined 20 to 25 percent. "Not only do they feel poor, they are poor," he said. "They are much less likely to spend."
The road ahead
With the Nov. 2 midterm elections in sight, economists don't expect any major developments. But their suggestions do include some steps under consideration by Congress, the Obama administration or both.

Shapiro and Zandi say stabilizing the housing market is crucial in the months ahead. Zandi recommended a program to help homeowners refinance their mortgages at cheaper rates. He said 10 million loans would qualify and people could save an average $100 a month, which they would then presumably spend. Housing secretary Shaun Donovan said last month that a refinancing program is planned, along with another one to help unemployed people stay in their homes.

Other steps the economists recommended were for the Senate to pass a stalled bill to give tax breaks to small business and make it easier for small business to get bank loans; and for lawmakers and Obama to resolve the fate of expiring Bush-era tax cuts.

Bivens said his no. 1 priority would be more aid to help state and local governments keep their workers. "We lost 48,000 jobs in July alone," he said. "That's an obvious hole that needs to be filled." He would also spend more on infrastructure projects and expand unemployment eligibility – for instance, to graduates who can't find jobs but don't have immediate work histories, as is now required. All of that will be "a really hard sell," given the political landscape, he said.

Congress just recently passed a state and local aid bill and has struggled to extend existing unemployment benefits, much less expanded ones. So Bivens is probably right about those being hard sells. But Obama did say this week that he is considering more spending on infrastructure, "redoubling" investment in clean energy and research and development, extending the Bush-era tax cuts for the middle class, and "further tax cuts to encourage businesses to put their capital to work creating jobs here in the United States."

Anything that happens now, given the political season and partisan stakes, will be "on the margin," as Zandi put it. But that's where a lot of workers and businesses are these days. Every drop of help will help as we await the payoff on Obama's investments in our future.

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The economists consulted by the writer of this article were obviously, with the exception of Holtz-Eakin, all Democrats who love to spend other people's money. I am not an economist, but I firmly believe that we should simply have tightened our belts, cut Government spending, and by now, we would be better off as a Nation. The $13 Trillion of debt we have run up will forever be a drag on our future economy--and, of course, under Government Accounting Principles, is grossly understated because it does not include military and civilian Government pensions, VA health care costs, the Social Security and Medicare "entitlements", etc. I fear that this Nation will not exist by 2050, at least not in any semblance of what it was when President Eisenhower's 2nd term ended.

October 11 2010 at 6:28 AM Report abuse rate up rate down Reply

The fact that the stimulus plan didn't deliver as Obama promised did the most damage.

September 21 2010 at 1:28 PM Report abuse +1 rate up rate down Reply

Here is a logical economic stimulus plan that will actually work! The "One - Year Mortgage Holiday" 9 Point Stimulus Plan as fully detailed at is the silver bullet solution to solve the current housing, credit, banking, financial crises, that will immediately jump start our economy, create millions of new Jobs, stimulate growth and generate long term economic prosperity through out America! The Mortgage Holiday Plan is the bold, ingenious ultimate "Trickle Up" stimulus plan that will help all home owners, renters and small/medium businesses that will actually work to stabilize the housing market and get America's economic wheel of commerce rolling again, which will also help balance the Federal budget and help start reducing the National Debt, which will strengthen the American dollar. The Mortgage Holiday is a fair and balanced legitimate stimulus plan, Of, By and For the People, Main Street that empowers We The People, allowing us to have a well deserved one year time out from making our monthly mortgage payment, so that we can decide how best to save, spend & invest our own money. Renters of apartments, office & retail space will also receive a monthly savings and partial rebate in rent. If you should agree, then we urge you to contact all of your elected Representatives as well as the White House to tell them to support the "One - Year Mortgage Holiday" 9 Point Stimulus Plan, that is supported by a majority of American's across the country, that actually take the time to simply read the Plan at! Mark

September 14 2010 at 10:24 AM Report abuse -2 rate up rate down Reply

There isn't I senior in America that will be here long enough to enjoy OBama's down the road future investments payoff. And if he beleives if nothing is done with jobs and the creation of new small business and IPO"s now..there will nothing at the end of his rainbow for any of our young people as well.. God Bless America.

September 10 2010 at 4:04 PM Report abuse +2 rate up rate down Reply

How much of our money is being sent south to finance more illegal immigrants?

September 04 2010 at 6:25 PM Report abuse +3 rate up rate down Reply

$13,449,202,260,174.02 and growing.

September 04 2010 at 2:17 PM Report abuse +4 rate up rate down Reply

The most cost effective stimulus would be to enforce our immigration laws and to install measures to encourage the illegals amongst us to return to their native land. I would immediately funds as many border control agents as possible to secure our borders. I would immediately fund the technology and infrastructure to help achieve this. Next I would increase the penalty for hiring illegals and really focus on tough enforcement. I would pass laws to ensure that only people here legally could transfer money outside the USA. Next I would end anchor baby policy either through a constitutional amendment or whatever is necessary to reverse the Supreme Court decision of 1982 that allowed The benefits of such policies are three fold: 1) Illegals hold approximately 8M to 12M jobs that would go to Americans, 2) jobs would be created to secure our borders and enforce the law, and 3) social costs associated with illegals such as increased spending on higher education, welfare, law enforcement, and having to maintain a bilingual infrastructure to accommodate two languages could be reduced and the savings used to enhance the safety net for legitimate citizens. It truly is a no brainer.

September 04 2010 at 10:30 AM Report abuse +3 rate up rate down Reply

May-be our History Books will explain how all of this happened to our Grand Children. I have been terorized enough by all the bad news. Can't you people tell us something good for A change, something we can trust and believe in. There is almost no Hope left in this nation and that is very bad. I like Productive so lets kick that around and do something right for A change. The rest of the World is makeing fun of the USA. The Actions in Washington DC. is disgraceful and I am truley ashamed that elected officials can't get along..long enough to do there jobs as expected. And, I might add..U-people stop your attacks on these people also.

September 03 2010 at 9:29 PM Report abuse -1 rate up rate down Reply

We didn't need a long range plan for economic recovery. We needed a plan that would have the soonest results.

September 03 2010 at 5:46 PM Report abuse +2 rate up rate down Reply

The question seems to have been answered. The ARRA was not a recovery bill but a cover for a wish lists of programs, good, bad or indifferent. All well and good except for "recovery" part which has not materialized and how it was sold to congress, with and wink, and the American people. A bigger bill would not have helped because it was either not spent (almost 50% remains to be spent as of August) or was not intended to help. Now American's are very unhappy at the broken promise of recovery and will hammer the offenders in November.

September 03 2010 at 2:07 PM Report abuse +8 rate up rate down Reply

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