Stimulus Bill's Winners and Losers

By James Martin and Rob Weigand

Proponents. It is probably no surprise that President Obama’s economic stimulus package is attracting at least as much criticism as support. One of the package’s few outright advocates, Robert Aliber, Professor Emeritus of International Economics & Finance at the University of Chicago School of Business, considers the plan a good deal overall. Professor Aliber calls it “80% ideal and 20% baggage.” He is particularly keen on the large tax cuts that should lead to an increase in both household spending and an improved sense of optimism, which he predicts will result in noticeable improvements in the economy in the near term. [1] CNN’s Ted Barrett and David Goldman echo the more widespread sentiment that there is no true optimism for the bill. They report that few proponents of the stimulus package are in love with every provision in the bill, but support it more because they feel it is necessary. [2]

Skepticism. Expert opinion is mainly confined to varying degrees of skepticism. CNBC Mad Money’s Jim Cramer asserts that the stimulus bill is essentially useless in confronting any real economic problems. Cramer referred to the package as an “utter joke,” because it comes up short on job creation, falling home prices, and the banking crisis. [3] Michala Marcussen from Societe Generale Asset Management shares Cramer’s sentiments – she claims that a lack of transparency about the details of many of the bill’s provisions are fueling pessimism and the negative market reaction. The bill is essentially long on ideas and short on concrete details. Pierre Gave from Gavekal Holdings agrees that the lack of information is causing many to express reservations. [4] James Falkiner, director & CEO of Falkiner Global Investors is not optimistic about the short term effects of the stimulus package. Most experts are in agreement that consumers will continue to save money to shore up their personal balance sheets. [5]

Market Reaction. US and global markets have not responded well to the stimulus bill. Laura Mandaro of Dow Jones MarketWatch observed a few weeks of mixed sentiment surrounding a second economic stimulus package manipulate the benchmark indexes. She asserts that optimism fueled a rally in stocks during the first week of February, but the S&P 500 Index and Dow Jones Industrial Average gave back most of those gains in the past two weeks with some spectacular intraday dives on February 10th and 12th, due to anxiety that the stimulus would fall short. [6] Bill Rhodes, chief investment strategist at Rhodes Analytics, maintains that people are concerned about the provisions of the stimulus package and about how they are going to play out. This investor pessimism about the US economy pushed the S&P 500 down 5 percent during the second week of February, and left the Dow at its lowest close since November 20. [7] Mark Luschini, Chief Investment Strategist at Janney Montgomery Scott, asserts that at some point the stimulus will instill some confidence in the economy that the markets can grasp onto. However, the investment community is waiting for positive prospects of the effectiveness of the government interventions. Investors are showing skepticism about whether these government injections are worth their face value. Luschini holds that the market is currently retracing its steps. It is returning the gains made in January when after benefitting from expectations that the market would recover. [8] In the 10 trading days following February 13, the Dow lost over 600 points (7.6%), and the S&P has followed giving up 8%, or nearly 70 points.

Breakdown. The stimulus bill allocates spending to three roughly equal sectors of the economy. The Congressional Budget Office reports that $308.3 billion, roughly 39%, is allocated to appropriations spending. That includes $120 billion on infrastructure and science and more than $30 billion on energy-related infrastructure projects. It devotes another $267 billion, or 34%, on direct spending, which includes things like unemployment benefits and food stamps. The bill also apportions $212 billion, or 27%, to tax breaks for individuals and businesses, with most of these enjoyed by individuals. 2

Stimulus Multiplier. The most hotly debated issue concerns the likely effectiveness of each spending category. Most experts rely on the concept of the stimulus multiplier, which is the expected amount of increase in GDP per unit of stimulus. The Global Insight group calculated the fiscal multipliers used by the Obama economics team. They found that the most effective component of the fiscal stimulus is infrastructure spending, which provides a multiplier of 1.7. This type of spending fuels GDP directly by putting idle resources to work, and indirectly by giving businesses and individuals extra income, which allows them to spend more. Transfers to state and local governments also give a highly effective multiplier of 1.4. The direct economic boosts will be as diverse as these different government units, but the key idea behind this spending is to prevent the economic downturn from becoming more severe. With many state and municipal budgets nearing default, there is little argument against this type of spending. The personal tax cuts/transfer payments have the smallest bang-for-the-buck, with a multiplier 0.6. They have no clear direct effect on GDP because they boost activity only when spent. It is widely agreed that a large proportion of the tax cuts will be saved as households try to rebuild their financial assets. [9]

Christina Romer, head of the Council of Economic Advisers, claims that tax cuts and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases. However, because there is a limit on how much government investment can be carried out efficiently in a short time frame, and because tax cuts and state relief can be implemented quickly, they remain crucial elements of any package aimed at easing economic distress quickly. [10]

Arpitha Bykere of RGE ‘s U.S. EconoMonitor holds that with the limited multiplier effects of tax cuts for households and firms, and a delay in the multiplier effects of federal and state government spending, much of the impact on growth in 2009-10 will come from automatic stabilizers such as unemployment benefits, food stamps, Medicaid and transfers to states. She therefore asserts that the stimulus should have allocated higher spending on automatic stabilizers, transfers to states and payroll tax cuts, and reduced spending on government projects that have high short-run fiscal costs but will impact growth only in the long run. [11]

Winners/Losers. Partisanship aside, passage of the economic stimulus bill has created winners and losers. The following list describes who came out on top and whose expectations were spoiled.

Winners

Education. The package includes a $25 billion down payment on K-12 school reforms and $47 billion to prevent cuts in state aid to school districts. Schools got roughly $100 billion in stimulus funding to be used for school construction bonds, programs for disabled students, low-income school districts and Pell grants.

The jobless and the poor. Unemployment benefits will be temporarily extended and increased while food stamp programs also receive a boost. Billions of dollars will flow into job training and temporary welfare payments.

The alternative energy industry. The package allocates $50 billion for energy efficiency and renewable energy programs.

General Motors Corp. (GM) Automakers got a tax break worth $3.2 billion that preserves its ability to claim refunds against taxes paid when times were good.

Large hospices. They won a reprieve, worth about $134 million, from cuts in the amount Medicare pays them to care for dying patients.

Technology companies benefit on two fronts: $7 billion to expand broadband Internet services, particularly in rural areas, as well as potential new business from $19 billion to help doctors and hospitals convert paper medical records to electronic files.

Losers

Homebuilders suffered a scale back of a $39 billion tax break that would have provided a $15,000 tax credit for homebuyers. The housing market will have to wait for another day for government help.

The nuclear energy industry lobbied relentlessly for $50 billion in federal loan guarantees for technologies that use little to no carbon, but saw it cut from the package.

The defense industry. There is no significant money for weapons systems; however, lawmakers approved several billion for military facility construction.

Large and medium-sized businesses. They lost $18 billion in tax breaks that would have allowed them to get refunds from applying current losses against taxes paid in years when they were profitable. [12] [13] [14]

Comments

[Robert A. W...:]

Ed K., you are absolutely right. Long term the U.S. taxpayer picks up the bill for our society's economic and financial excesses from 1996-2008.

Mar 02 10:03 AM

[robert.b.fe...:]

The time frame actually is more like from 1977 to NOV 2008. 2/3 of the package won't even be in play for at least two years. Stimulous money in play right now is going to a very narow band of the economy (unemployment/food stamps) and is targeted more to social engineering than stimulous. People on unemployment and food stamps don't employ others (I never got a job from a poor person) or purchase big ticket durables. Those tax cuts for individuals are miniscule and not likely to stimulate any thing not even republicans. Face it $600 spread over a year isn't going to be a multiplier. Housing will have to bottom before the broad economy recovers and, while there are some encouraging signs, there is more down side to come. Calling this a stimulous package is being very generous indeed.

Mar 02 10:41 AM

[Barry Sotoero:]

Conservatism
Conservatives believe in the importance of social order. This is reflected in a respect for tradition, an emphasis on the importance of religion, and a stress on the importance of inequality - such as inequalities of class or caste - as the basis for structured social relationships. Welfare is a secondary issue, but the kinds of concerns which conservatives have are likely to impose restraints on welfare, with a particular emphasis on traditional values in work, the family, and nationhood. Welfare does raise concern where it is seen to have implications for public order - one British conservative commented, in commending the Beveridge report, that "if you do not give the people social reform they are going to give you revolution."

Christian democratic thought is closely related to conservatism, but it also has important distinguishing features. Like conservatives, Christian Democrats place a strong emphasis on order; but order is to be achieved, not primarily through state action, but by moral restraints. These moral restraints have principally in Europe reflected the influence of the Catholic religion. Catholic social teaching has emphasised both the limits of the state and the responsibility of people in families and communities for each other; christian democrats tend, then, to favour limitations in the role of the state while at the same time accepting moral responsibility for social welfare.

Liberal individualism
Liberalism begins from the premise that everyone is an individual, and that individuals have rights. As a political position, liberalism has been important as a means of defending people from abuse by authority. Although liberalism was initially a radical doctrine, it has also been used since the 19th century to stand for a defence of propertied interests.

The central value of liberalism is freedom. All freedoms are not equally important; the main liberal values are concerned with certain particularly important freedoms, such as freedom of assembly, of speech, and of worship.

Liberals mistrust the state and argue that society is likely to regulate itself if state interference is removed. Hayek argues that all state activity, whatever its intentions, is liable to undermine the freedom of the individual; that society is too complex to be tampered with; and that the activities of the free market, which is nothing more than the sum total of activities of many individuals, constitute the best protection of the rights of each individual.

Fascism


A rally of British fascists in 1939.
(c) Hulton-Getty collection.
`

Fascism is often represented in the academic literature as a pseudo-ideology, lacking any coherence or system of thought. This was a political position taken post-war in an attempt to deny the romantic and emotional appeal of fascist thought. Fascist ideology is based in an authoritarian collectivism. The individual is meaningless; the collectivity (the state, the nation or the race) is paramount. Fascism has been characterised by a strong social agenda; in Nazi Germany, the desire to foster racial supremacy included extensive state intervention in society and the economy, with a stress on socialisation (both through schooling and youth movements) and eugenic policies.

Where are we headed?

Mar 02 10:54 AM

[ain't no fo...:]

Author(s):

Overall, a good article, but I must strenuously ask what you are thinking when you seriously consider Crammer an "expert":

"Skepticism. Expert opinion is mainly confined to varying degrees of skepticism. CNBC Mad Money’s Jim Cramer asserts that the stimulus bill is essentially useless in confronting any real economic problems. Cramer referred to the package as an “utter joke,” because it comes up short on job creation, falling home prices, and the banking crisis."

Good grief, the guy is no more than a shill and pitchman for hedge funds and Goldman and other special interests - he has a pathological hatred for Geithner for some reason, and he projects it on the administration at large, and he has at least one tasteless rant against him every show.

His picks are subpar and have lost many people a lot of money, and he changes directions more times than the wind.

I'm afraid your credibility suffers in my book when you credit him with "expert" status.

Mar 02 11:06 AM

[henarl:]

You left out the biggest losers - our kids and grandkids who will have to pay for this excessive government spending for the rest of their lives.

Mar 02 11:22 AM

[relaplan1:]

The core belief of liberalism is based on social and economic equality of outcome among races, ethnic groups and individuals who are not capable of equality of outcome. The result is a social order that requires redistribution of income and police state tactics for enforcement. Individual freedom and liberty are the antithesis of liberalism.

In the United States the most successful racial and ethnic groups are Asiatics. All people of color.


On Mar 02 10:54 AM Barry Sotoero wrote:

> Conservatism
> Conservatives believe in the importance of social order. This is
> reflected in a respect for tradition, an emphasis on the importance
> of religion, and a stress on the importance of inequality - such
> as inequalities of class or caste - as the basis for structured social
> relationships. Welfare is a secondary issue, but the kinds of concerns
> which conservatives have are likely to impose restraints on welfare,
> with a particular emphasis on traditional values in work, the family,
> and nationhood. Welfare does raise concern where it is seen to have
> implications for public order - one British conservative commented,
> in commending the Beveridge report, that "if you do not give the
> people social reform they are going to give you revolution."
>
> Christian democratic thought is closely related to conservatism,
> but it also has important distinguishing features. Like conservatives,
> Christian Democrats place a strong emphasis on order; but order is
> to be achieved, not primarily through state action, but by moral
> restraints. These moral restraints have principally in Europe reflected
> the influence of the Catholic religion. Catholic social teaching
> has emphasised both the limits of the state and the responsibility
> of people in families and communities for each other; christian democrats
> tend, then, to favour limitations in the role of the state while
> at the same time accepting moral responsibility for social welfare.
>
>
> Liberal individualism
> Liberalism begins from the premise that everyone is an individual,
> and that individuals have rights. As a political position, liberalism
> has been important as a means of defending people from abuse by authority.
> Although liberalism was initially a radical doctrine, it has also
> been used since the 19th century to stand for a defence of propertied
> interests.
>
> The central value of liberalism is freedom. All freedoms are not
> equally important; the main liberal values are concerned with certain
> particularly important freedoms, such as freedom of assembly, of
> speech, and of worship.
>
> Liberals mistrust the state and argue that society is likely to regulate
> itself if state interference is removed. Hayek argues that all state
> activity, whatever its intentions, is liable to undermine the freedom
> of the individual; that society is too complex to be tampered with;
> and that the activities of the free market, which is nothing more
> than the sum total of activities of many individuals, constitute
> the best protection of the rights of each individual.
>
> Fascism
>
>
> A rally of British fascists in 1939.
> (c) Hulton-Getty collection.
> `
>
> Fascism is often represented in the academic literature as a pseudo-ideology,
> lacking any coherence or system of thought. This was a political
> position taken post-war in an attempt to deny the romantic and emotional
> appeal of fascist thought. Fascist ideology is based in an authoritarian
> collectivism. The individual is meaningless; the collectivity (the
> state, the nation or the race) is paramount. Fascism has been characterised
> by a strong social agenda; in Nazi Germany, the desire to foster
> racial supremacy included extensive state intervention in society
> and the economy, with a stress on socialisation (both through schooling
> and youth movements) and eugenic policies.
>
> Where are we headed?

Mar 02 11:36 AM

[Mad Hedge F...:]

Some good arhuements! The US is turning into Europe. Think high taxes, high unemployment, more government involvement in everything, and much lower growth. That is the message the markets are telling us by retreating to the 6,000 handle, levels not seen since 1996, and down 54% from the peak only 17 months ago. Equity prices are shrinking to multiples in line with a permanently lower long term growth rate of maybe 2%, a shadow of the 5% rate seen for much of this decade. Maybe this is what mature economies are supposed to look like. If you do buy American stocks, only buy the ones that are really foreign stocks with American sounding names. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-70% of their profits from overseas where high growth rates have migrated. I think I’ll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth.

Mar 02 11:53 AM

[Robert A. W...:]

I think you're right, perhaps the sentence should have read "public" opinion instead of "expert" opinion. Hopefully we'll re-earn some credibility with our future posts. Thanks for your comments.


On Mar 02 11:06 AM wpdragon wrote:

> Author(s):
>
> Overall, a good article, but I must strenuously ask what you are
> thinking when you seriously consider Crammer an "expert":
>
> "Skepticism. Expert opinion is mainly confined to varying degrees
> of skepticism. CNBC Mad Money’s Jim Cramer asserts that the stimulus
> bill is essentially useless in confronting any real economic problems.
> Cramer referred to the package as an “utter joke,” because it comes
> up short on job creation, falling home prices, and the banking crisis."
>
>
> Good grief, the guy is no more than a shill and pitchman for hedge
> funds and Goldman and other special interests - he has a pathological
> hatred for Geithner for some reason, and he projects it on the administration
> at large, and he has at least one tasteless rant against him every
> show.
>
> His picks are subpar and have lost many people a lot of money, and
> he changes directions more times than the wind.
>
> I'm afraid your credibility suffers in my book when you credit him
> with "expert" status.

Mar 02 03:57 PM

[Danny Newton:]

The claim that there is 1.7 dollars returned for every dollar spent is pretty impressive unless you factor in the time it takes to get the $1.7 back. At 3.5%, it would take between 15 and 16 years. (15.42 years) $3.5% is roughly the average background inflation rate. Calculating a rate of return on an investment is not an exact science but I see it done all of the time, especially when the public is being manipulated into springing for a sports stadium, convention center or some other grotesque waste of tax money. There were claims of a 30% return on Interstate highway construction that went unchallenged for decades until a study was commissioned in the past few years that showed that there was only a 10% return on investment. The people who commissioned the study wrote a disclaimer included with the report that seemed to satisfy the fraction of those who found the number too low to use as a pry bar on the Congress for more transportation investment.

This begs the question of why is an activity good in one decade and bad in another. There must be more than one reason and sometimes the reasons are fact dependant but the overarching concept is probably related to the incremental rate of return. The question must be: Does the incremental increase in cost justify the incremental benefit.

When the Interstates were built, there was a very large boost in productivity associated with higher mobility. There was also a lot of pain as roadside services along parallel routes began to fail and centers of cities also went into a decline. There was more travel because of the increased convenience but there were also fewer motel rooms sold per trip. There was more leisure travel and there were more people traveling greater distances for employment.

The rate of return on the Interstate Investment came from added productivity. If we built more Interstates, especially more routes, the bump will not be as profound as building more lanes onto the system we already have. The Clinton Administration toyed with the idea of truck only lanes and allowing trucks to go (legally) 85 miles per hour. This would have been a great boost to productivity but the train freaks killed it because of a study showing that it would probably kill the train business or at least shrink it even farther to basic bulk commodities and agricultural goods. The new and better system we have now has also become a new base line from which increased in productivity are measured. The shovel ready projects that were in the transportation sector were largly the continued mistakes of the past that were stored up in short three year plans at highway departments. Flower planting, sidewalks, bike trails, museums, ethanol subsidies and pedestrian bridges are not likely to have a huge rate of return.

As a society we are totally helpless when it comes to measuring benefits and costs because in order to salvage preconceived notions, the benefits and costs are cynically manipulated. The main way of doing that is to include external benefits and if that fails, try and monetize the ethereal concepts of human worth, diversity, planetary salvation and guilt enemas. The Clinton Administration put into place in about 1994 a set of accounting guidelines that would have put government on a disciplined path to good government policy but could not control the creativity of those who wanted to sabotage any policy that was counter to their already held prejudices. Medical costs of Asthma, Carbon Foot Print, Noise, Cost of Pollution and other concepts were monetized in a way that any public policy could be supported by just controlling the benefit cost analysis. Even the cost of human life became different from agency to agency. That basic cost rose at six times the background inflation rate over about 30 years for even the most conservative agency.

No proof of failure is more dramatic than the benefit costs analysis done in transportation. The proof that it is a failure is simple. After years of decision making based on a matrix of the value of human life, crash damage, medical expenses, congestion costs, pollution costs and other factors, none of the evils that were to be diminished ever diminished in any substantial way. We only pretend to make better decisions. It might be argued that the average number of vehicle miles traveled between deaths is improving but it can also be argued the the average speed of vehicles is also declining and capable of explaning that. Car design also helped, not public transportation policy. Theoretically, you should have at least seen your car insurance cut in half every 12 years. Even if you got rid of teenagers, that did not happen, so I rest my case.

Mar 02 11:59 PM

[Robert A. W...:]

Danny: Thank you for that great reply. Very thoughtful and elegantly expressed. We appreciate your contribution.

Mar 04 08:11 PM

[Robert A. W...:]

Mad Hedge Fund Trader: I like the Tahiti solution -- only problem is there will be a million of us competing to harvest those coconuts and pineapples. Then what?!


On Mar 02 11:53 AM The Mad Hedge Fund Trader wrote:

> Some good arhuements! The US is turning into Europe. Think high taxes,
> high unemployment, more government involvement in everything, and
> much lower growth. That is the message the markets are telling us
> by retreating to the 6,000 handle, levels not seen since 1996, and
> down 54% from the peak only 17 months ago. Equity prices are shrinking
> to multiples in line with a permanently lower long term growth rate
> of maybe 2%, a shadow of the 5% rate seen for much of this decade.
> Maybe this is what mature economies are supposed to look like. If
> you do buy American stocks, only buy the ones that are really foreign
> stocks with American sounding names. Microsoft (seekingalpha.com/symbo...),
> Intel (seekingalpha.com/symbo...), Oracle, (seekingalpha.com/symbo...),
> Cisco (seekingalpha.com/symbo...) all get 60%-70% of their
> profits from overseas where high growth rates have migrated. I think
> I’ll move to Tahiti and live off of coconuts and freshly speared
> fish, wearing only a loin cloth.

Mar 04 08:12 PM

[Robert A. W...:]

Barry: Thanks for your reply -- very thoughtful and well-expressed. In terms of where we are headed . . . the pendulum swings in both directions, but not always symmetrically. I believe, if the economy remains weak for a prolonged period, Obama will retain his mandate to move the country to a more highly-regulated state. As soon as the economy bottoms and markets begin moving upward, however, we'll remember our free-market capitalist roots and the movement towards regulation will halt, and almost certainly reverse somewhat. We may even have to nationalize a few banks (or let them fail) as Joe Stiglitz suggested on CNBC Wednesday. But the US is not heading for anything resembling real socialism -- in my opinion.


On Mar 02 10:54 AM Barry Sotoero wrote:

> Conservatism
> Conservatives believe in the importance of social order. This is
> reflected in a respect for tradition, an emphasis on the importance
> of religion, and a stress on the importance of inequality - such
> as inequalities of class or caste - as the basis for structured social
> relationships. Welfare is a secondary issue, but the kinds of concerns
> which conservatives have are likely to impose restraints on welfare,
> with a particular emphasis on traditional values in work, the family,
> and nationhood. Welfare does raise concern where it is seen to have
> implications for public order - one British conservative commented,
> in commending the Beveridge report, that "if you do not give the
> people social reform they are going to give you revolution."
>
> Christian democratic thought is closely related to conservatism,
> but it also has important distinguishing features. Like conservatives,
> Christian Democrats place a strong emphasis on order; but order is
> to be achieved, not primarily through state action, but by moral
> restraints. These moral restraints have principally in Europe reflected
> the influence of the Catholic religion. Catholic social teaching
> has emphasised both the limits of the state and the responsibility
> of people in families and communities for each other; christian democrats
> tend, then, to favour limitations in the role of the state while
> at the same time accepting moral responsibility for social welfare.
>
>
> Liberal individualism
> Liberalism begins from the premise that everyone is an individual,
> and that individuals have rights. As a political position, liberalism
> has been important as a means of defending people from abuse by authority.
> Although liberalism was initially a radical doctrine, it has also
> been used since the 19th century to stand for a defence of propertied
> interests.
>
> The central value of liberalism is freedom. All freedoms are not
> equally important; the main liberal values are concerned with certain
> particularly important freedoms, such as freedom of assembly, of
> speech, and of worship.
>
> Liberals mistrust the state and argue that society is likely to regulate
> itself if state interference is removed. Hayek argues that all state
> activity, whatever its intentions, is liable to undermine the freedom
> of the individual; that society is too complex to be tampered with;
> and that the activities of the free market, which is nothing more
> than the sum total of activities of many individuals, constitute
> the best protection of the rights of each individual.
>
> Fascism
>
>
> A rally of British fascists in 1939.
> (c) Hulton-Getty collection.
> `
>
> Fascism is often represented in the academic literature as a pseudo-ideology,
> lacking any coherence or system of thought. This was a political
> position taken post-war in an attempt to deny the romantic and emotional
> appeal of fascist thought. Fascist ideology is based in an authoritarian
> collectivism. The individual is meaningless; the collectivity (the
> state, the nation or the race) is paramount. Fascism has been characterised
> by a strong social agenda; in Nazi Germany, the desire to foster
> racial supremacy included extensive state intervention in society
> and the economy, with a stress on socialisation (both through schooling
> and youth movements) and eugenic policies.
>
> Where are we headed?

Mar 04 08:16 PM