Stimulus Bill Signed; Now, Will It Work?

As President Obama signs the 2009 American Recovery and Reinvestment Act today, a common question is, will it work? Of course we won’t know for a while, but my honest non-partisan opinion is “a little bit.” There is little doubt that parts of the bill are positive for our country and the employment situation, whereas others are likely to not do us any good. I think that the extreme views on either side, that this bill will either bring us out of recession or make it far worse, are both unfounded.

In particular, there are some people who insist FDR’s New Deal in the 1930s prolonged the Great Depression, and only when World War II began did the economy rebound. They use this argument to imply that this stimulus bill (a mini New Deal of sorts) will further cripple our economy. I just wanted to share the chart below with everyone in order to debunk this myth.

Arguing that government spending does not create jobs is pretty silly. You can certainly take the position that government should not do anything (let the market work!), or that we are spending too much money when we are already in debt (to the tune of $10 trillion!), but denying that building a road, or upgrading a power grid, or funding medical research grants will require incremental workers is a pretty strange assertion.

The idea that tax cuts are a better means to create jobs is odd too because giving a tax cut to an unemployed person (who isn’t earning any money) doesn’t really help him very much, and it certainly doesn’t get his job back. An extra $13 per week (or whatever the number is) might help people pay their bills, but it can’t boost demand enough to force companies to need to hire more workers to meet that demand.

All in all, I think this bill is far from perfect and I don’t think it will have the same impact as the New Deal did on our economy. That said, there is no reason to think it won’t have some impact. Probably not enough to return to positive economic growth and falling unemployment anytime soon, but before we can grow again we have to halt the decline and hopefully this bill can contribute to that goal. Everyone should hope it works, whether you supported it or not.

Comments

[JohnL:]

With regard to the efficiency of government spending during the Depression, my grandfather knew men that worked for the Works Progress Administration (WPA). The guys all said WPA stood for "We Putter Around" because of the enormous levels of waste. Think DMV or USPS before FedEx and UPS came along. Obama might spend a lot of money, but don't count on it being well-spent.

Feb 17 09:16 PM

[Jolly_Rancher:]

The authors is correct. The "stimulus bill" will have a small positive effect on GDP. What's there to argue and why the uproar?.

Feb 17 09:41 PM

[Moon Kil Woong:]

It would be much more helpful if you show a comparison to the spending with economic recovery. In effect, the New Deal didn't do a whole lot compared to WWII. If that's is the positive effect trying to be conveyed egads... does that mean we need a WWIII?

On a more solid note, I am much more concerned with how intrusive the government will get into the private sector. Will the government bailout the Auto Industry and give it employment mandates? Will it tell banks to lend to those who are risky? Will we become a militant quasi-socialist managed state dependent on government stimulus and spending like Bush Jr. drove us towards or will we reverse course? If we are to become socialized, I'd much rather have free healthcare than a bunch of insolvent banks you have to give billions to every few months to lend a few dollars to.

Give the average citizens free stuff or give us capitalism. Since the first isn't going to happen I support the second.

Feb 17 10:22 PM

[Dirk McCoy:]

It's too bad that three years from now we'll still be arguing what "helped"- TARP, this stimulus bill, Fed monetization of debt, or the wave of restructurings underway- and won't have learned much as a nation of voters.

I only hope that we will have at least learned that Fed rate increases can create disasters. Unless you want to state that Fed rate decreases are really to blame, in which case you should be screaming given where the discount rate is- and I don't hear much screaming about that these days.

Feb 17 10:24 PM

[{5U}:]

When the government is involved, $1 does not = a $1 increase in GDP.

Something gets lost along the way. There is nothing lean about pork.

Feb 17 11:25 PM

[User64738:]

If you look at the fed interest rates during depression years, you'll realize why everything was doing great. You should also look at what happened to the dollar purchasing power after the new deal was struck. Your GDP was going up, but the real value of dollar was going down.

Feb 17 11:48 PM

[matthutch:]

the stimulus will probably have an effect on measured gdp in the short run, but does that mean it was worth it? does that mean "the economy" is better off? how are going to measure the extent to which it works? when measured gdp rises, and it will, those who exercise great faith in government action will declare success, because they will look to these crude government statistics as a measure of efficacy. i'm sure with each legislative stone politicians (and their complicit economists) threw into "affordable housing" river, such as mortgage interest deductions, capital gains exclusions, Fannie and Freddie, etc, they all patted each other on the back. After all, they concluded, it didn't cause any harm. well, au contraire mon fraire. we might see some kind of paper recovery, just like we did through the first part of the decade, as government policy encourages people to invest in something we shouldn't (heck, maybe it'll be homes again; politicians seem to somehow "know" what the right price of housing is and we now are below that price so they will incentivize us to invest).

Feb 18 12:05 AM

[Hoping:]

This editorial is as non- partisan as the writing of the bill. With all due respect to the writer... if we had a stimulus bill you could write this. But we don't... we have a spending bill that does very little... if anything to address any of the current problems. In fact, a secondary story... increasing troops in Afghanistan sort of reminds one that the only way the world will escape and pay for the current DEPRESSION is through a world conflict. My bet... this conflict begins shortly... along with a draft... and therefore an easing of the unemployment numbers. I am surprised at the writer looking at the money spent in the spending bill and a failure to add in the three or four additional trillion that has or will be spent. Better build a lot of roads, huh?

Feb 18 12:11 AM

[Al-USA:]

My fellow Americans, the real issue is the Fed, and its war on the middle class. See the link below if you're interested in preserving the Republic:

" The Fed's War on the Middle Class"
mises.org/story/2983

Feb 18 12:22 AM

[/\ Game:]

Chi-town Eric:

Yours is one of the most level-headed posts in the string. Thank you for pointing out that, contrary to popular opinion, banks actually do CREATE wealth via LEVERAGE. Counter-intuitive as it is, this spending is necessary to save us from the evils of over-spending.

Now, I'm the first to agree that the bill is a joke. Even the fastest lawyers in the world, smoking crack non-stop, couldn't have put together a bill this big in such a short amount of time unless they were literally pasting together ready-to-go pet projects from Pelosi and Co. I find it even less likely that they have researched or estimated the likely employment-related effects of over 1/2 the line items. Unfortunately, President Obama doesn't have the luxury of a line-item veto (nor the time, even if he did) and had to essentially take it or leave it. But, a joke or not, this bill is crucial right now and he had no choice but to sign it and move forward.


On Feb 17 05:35 PM Eric in Chicago wrote:

> Bears are out en masse. I am not sure what the depression era chart
> proves or doesn't prove. Bottom line is that borrowed money does
> create money. Credit (however evil you think it is) drives growth.
> As long as we are borrowing money to create something, a job, a road,
> then that will have a multiplied effect. I think it is funny that
> people oppose Obama and continue to tout the Bush tax cuts as the
> holy grail. Wow! Just think how bad it would have been without the
> last 8 years of tax cuts; we would have seen the fall of all civilization.
> The problem is that everything has its place, and when the economy
> is growing, you don't need to cut taxes, and you don't need to spend.
> You should be balancing the budget. When the worst is upon us, you
> can't draw everything in and exacerbate the economic contraction.
> If the govt doesn't spend, no one else will. Look at Hoover, he didn't
> do anything. Now, look at FDR, he went big and we have had a growth
> economy since. His one major mistake was trying to balance the budget
> too soon, that is why he saw a recession in 1937.

Feb 18 12:24 AM

[wildfirexx:]

The current global economy is in a tailspin out of control much like the great depression started...people are scared....the stimulus package is at least an attempt by the federal government to help stabilize the economy, before it crashes. The goverment should also be encouraging the masses that are still comfortably employed to go out and spend a little more to help resue the economy from disaster.

Feb 18 12:27 AM

[TR1:]

Interesting comment I read:

FDR did not bring unemployment down to a sufficient level with his programs because he did not spend enough. It was only once he had the cover of a war that he could really unleash defecit spending that got the economy going again. If he tried to build that much industry without a war, it would have been an outrage.

Food for thought, but pretty counter-intuitive in today's convention.

Feb 18 12:31 AM

[Nik Kondrat...:]

Chad,

Nice article. Your points are well taken. Regardless of how we feel about the stimulus, there is no reason we shouldn't hope for the best. And I think it's important to highlight both the fact that this stimulus plan is not on the same scale as the New Deal programs instituted by Roosevelt and that the New Deal was a positive force generating GDP growth. People may not like the fact that Congress hastily approved an $800 billion plan to revitalize our economy, and people may take issue with where the money is being spent, but expressing any kind of Schadenfreude is foolish. We all want our economy to turn around and prosperity to return.

Nik

Feb 18 12:32 AM

[/\ Game:]

It most certainly is not the only stimulus spend. Today's bill is a down-payment, at-best. We all need to get used to numbers like 5, 6, 8 Trillion, before there is traction. Hopefully, someone with intelligence and the clout to be heard is starting (or better yet, finishing up) the thorough analysis that should have been done on the current plan.

Mauldin painted a pretty plausible picture last month, speculating that just as we do get traction with thesecond or fourth stimulus spend, we will run fresh out of social security surplus and have to either shut down 2/3 of the government or tax us all into submission. Either way, we end up in a doule-dip recession/depression, only to be saved by a bull market fueled by technologies that are barely on the radar right now (circa 2014).


On Feb 17 07:13 PM Lars39 wrote:

> The Stimulus Bill will probably work to prolong the Depression (Recession
> if you like) for another 10 years. Don't think that this will be
> the one and only stimulus spend, expect more to come until some improvement
> is seen or high inflation is apparent.

Feb 18 12:42 AM

[Dave Wrixon:]

Yes, but despite promises there is little evidence Obama is going to deliver on infrastructure.


On Feb 17 05:14 PM Paul H. M. wrote:

> It's funny how people don't realize that the infrastructure created
> during the New Deal made the last 70 years of economic growth possible.
> Do you really think we would have done as well without all the grids,
> roads, schools, water lines, and bridges?
>
> The Free Market doesn't build roads and bridges on its own, that's
> why we need a New Deal every once in a while to keep our economy
> strong.
>
> Now that we've outgrown our infrastructure built almost a century
> ago, it makes sense that we need a New New Deal to build the foundation
> for the next century of growth.
>
> Without these periods of big infrastructure spending, we would never
> be a world leader in anything. The New Deal played a large part in
> making business boom for many decades after, and the stuff we're
> building now is equally important to future generations.

Feb 18 01:23 AM

[Dave Wrixon:]

Perhaps that was what Bush was doing in Iraq?


On Feb 18 12:31 AM TR1 wrote:

> Interesting comment I read:
>
> FDR did not bring unemployment down to a sufficient level with his
> programs because he did not spend enough. It was only once he had
> the cover of a war that he could really unleash defecit spending
> that got the economy going again. If he tried to build that much
> industry without a war, it would have been an outrage.
>
> Food for thought, but pretty counter-intuitive in today's convention.

Feb 18 01:26 AM

[john s. gordon:]

on the chart notice how GDP increased in 1939-40 when britain was buying war meteriel from us. do we have that kind of stimulus available today?
> jack

Feb 18 08:20 AM

[PFandGF:]

"That said, there is no reason to think it won’t have some impact. Probably not enough to return to positive economic growth and falling unemployment anytime soon, but before we can grow again we have to halt the decline and hopefully this bill can contribute to that goal. Everyone should hope it works, whether you supported it or not."

Where do I start... your right, there IS no reason to think it wont have SOME impact. Yes, it will have an impact alright, this bill (call it porkulus, spendulus) whatever you want to call it it doesn't matter. This bill (along with the republicans bill) is doing nothing but putting us closer to Argentina or Zimbabwe levels

your comment everyone should "HOPE" it works? WHAT? I can't believe you ended your piece with that comment! People we have to get past this HOPE as if HOPE is going to pay our bills or HOPE is going to stop the corrupt spending in washington as if HOPE is going to change the greed that our political system is so entrenched in.

Look I can HOPE for anything I HOPE I walk outside this morning and trip over a bag full of money but that HOPE is nothing to bank my future on...

We need to take some of this "HOPE" and transform that into ACTION! and I don't mean by MORE spending I mean by kicking the people in washington OUT of office and cut spending immediately.

I'll tell you what, if something doesn't change and QUICK we are going to wake up in a third world country.

(a bunch of 3rd graders could run this country better than its being ran right now!)

Listen the time for "getting ready" is quickly coming to an end. Your window for opportunity is closing fast.

visit: PrepareForAndGainFrom....

Feb 18 09:03 AM

[PainfullyAware:]

Our Representatives Did Not Even Read It !!!

The Circus Is Almost Over.

Those who expect benevolence from those with no incentive will be disappointed.

When Representation Returns To Washington Things Will Improve. Until that time the Corprotocracy will continue to subjugate and undermine the populous.

When you can create money out of thin air you can buy governments.


On Feb 18 12:24 AM /\ Game wrote:

> Chi-town Eric:
>
> Yours is one of the most level-headed posts in the string. Thank
> you for pointing out that, contrary to popular opinion, banks actually
> do CREATE wealth via LEVERAGE. Counter-intuitive as it is, this
> spending is necessary to save us from the evils of over-spending.
>
>
> Now, I'm the first to agree that the bill is a joke. Even the fastest
> lawyers in the world, smoking crack non-stop, couldn't have put together
> a bill this big in such a short amount of time unless they were literally
> pasting together ready-to-go pet projects from Pelosi and Co. I
> find it even less likely that they have researched or estimated the
> likely employment-related effects of over 1/2 the line items. Unfortunately,
> President Obama doesn't have the luxury of a line-item veto (nor
> the time, even if he did) and had to essentially take it or leave
> it. But, a joke or not, this bill is crucial right now and he had
> no choice but to sign it and move forward.
>
>
> On Feb 17 05:35 PM Eric in Chicago wrote:

Feb 18 10:33 AM

[P. Kalven:]

By the tenor of this conversation there appears to be a prevailing attitude that a return to pre-New Deal Era economics is better than the current; if that is the case allow me to open the window on the 37th floor for you.

Before you expound on the New Deal and condemn or praise it read “The Moral Consequences of Economic Growth” Benjamin M. Friedman, Vintage Press 2005 pages 168-179

Much of the New deal was an experiment, some failed and some did not; the alternative political path of the day was fascism or communism. It was the head of the Republican Party of the Day that labeled the New Deal “Communist”; somewhat in the same spirit of Joe McCarthy bandied about the term after the war.

Considering that unemployment in 1934 was 25%; unemployment at 14% in 1940 looks like an improvement. The 1938 mid term elections shifted the balance of power in congress and may better explain the lag in cause and effect. Prior to 1938, 8 Million people were employed by or through some of the New Deal programs; that by the way is about 10% of the current world wide projection of unemployed at a time when the US population was not 350 Million.

The concept of employment multiplier appears to be missing from this discussion in a meaningful way: If a highway is improved, or an opera house is built, or any other construction project; yes it improves its local economy; the opera house may employ a few full time people, but it also creates a demand, for sand, gravel, cement, steel, oil, tools, plastics, food, coffee, sugar, salt, ore, aluminum, casein, latex, enamel, phosphorous, formaldehyde, lumber, cotton, wool, even beer and scotch etc, as well as all the transportation, warehousing and handling of those myriad of goods. I suspect it also create demand for the product of our inventor working away on his energy saving technology.

Feb 19 01:18 PM