Why Isn't the Stimulus Stimulating?

The problem is that Obama was always much too optimistic about how quickly stimulus spending could have an effect. 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..

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..

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.

~Bruce Bartlett in FORBES

Bottom Line: Most of the fiscal stimulus spending will likely impact the economy when it isn't really needed, i.e. after the economy has already started to recover. If we have positive economic growth yet this year in the third (.60% real GDP) and fourth quarter (1.9%) like economists are predicting (WSJ survey, see chart above), and 2.6% real GDP growth next year, the fiscal stimulus will be stimulating an economy in recovery, i.e. an economy that doesn't need stimulus.

As Bruce Bartlett points out in in this article, there has been a successful stimulus package since WWII that actually provided stimulus with the correct timing. Because of the lags associated with: a) recognizing the economy was slowing down, b) designing and legislating a fiscal stimulus program, and c) waiting for the fiscal stimulus to have an impact on job creation, etc. there has never been a successful fiscal stimulus, at least in terms of successfully impacting an economy at the time when it is most needed.

Comments

[CautiousInv...:]

It's not easy getting a handle on how much spending has actually occurred and how much tax relief has been extended.

It's been reported that $60 billion has been spent and $40 billion in tax relief has been realized. Using these numbers, it looks like 13% of the total is in the economy with very little having been spent in the first quarter. It's unrealistic to think this amount, with lag times, would do much to stimulate the economy.

With 87% remaining to be spent/extended out of the original total of $787 billion, it would be bad policy to contemplate additional stimulus without allowing sufficient time for the first increment to be released and work its way through the economy.

There are several risks to additional spending: additional debt with dubious benefit and the author's point that it is difficult to calibrate the time and effect of fiscal stimulus; there is a possibility of a second round "layering" on the first round and increasing price pressures, which might then lead the Fed to take policy action to increase interest rates.

This, then, could undue all that has been done to stimulate the economy.

Jul 13 10:31 AM

[Pottermus:]

Certain groups such as banking, insurance, etc. are necessary to allow an economy to function.

With all this inplace until the general population is secure and employed, making money to allow them to spend comfortably, the economy is not going anywhere. The fat cats get fed, but the economy is not going anywhere.

Jul 13 12:42 PM

[conceptwizard:]

In fact, since the peak of the housing bubble (in the U.S.) in 2005, the onslaught of the subprime financial crisis in August 2007 and the beginning of the recession in December 2007, the U. S. economy, and to a certain extent, the world economy, have entered a period of protracted adjustments. For sure, there will be some quarters of positive economic growth ahead and the recession may be declared officially over in the coming months, but the radical economic reorganization that is taking place will go on for years to come.

Why is this so?

Essentially, because we are at the very end of the 60-year inflation-disinflation... Kondratieff cycle that began in 1949 when war-frozen prices were liberalized; and that powerful long cycle is ending now. The post 1980s era, i.e. the Reagan era, is over, but the excesses and bubbles of the last few decades have to be corrected, at a time when large population shifts are about to take place. Such adjustments will take years to unfold and this will entail a lot of efforts and a lot of changes.

Indeed, the era of excessive spending and of excessive debt is over. The era of excessive government economic disengagement and of financial deregulation is over. The era of irresponsible Ponzi-scheme finance is over. The era of unregulated derivatives is over. The era of greed as an ideology is over. The era of wild and predatory capitalism is over. The era of cheap oil, of cheap transportation, of cheap commodities and of cheap food is over. The era of excessive concentration of wealth and income is also over. However, the age of political corruption, of incompetent politicians and of destructive wars of aggression is not over. What has arrived is the age of hyperstagflation.

Jul 13 01:53 PM

[urbanexus:]

Thanks for the references to the Barlett pieces. Great perspective.

I think there is a word missing from the first sentence of the last paragraph of your post--that word would be "not." I think you mean to say "As Bruce Bartlett points out in in this article, there has NOT been a successful stimulus package since WWII that actually provided stimulus with the correct timing."

Jul 14 10:42 AM

[The Greates...:]

The pure facts are clear, people are not buy anything that they do not need. The recovery is a long way off, like all the jobs that have been lost since July 08. Like the old saying goes, “It is time to pay the piper.” The bailouts that went to the too big to fail did nothing for the US economy, throwing good money after bad money never works. The worlds economy is too global for any amount of bailout to work, it is simply too large of a problem. The over all global economy is going to have to go through a trimming down effect, “cutting the fat” so to speak. And that is why America is losing 450,000 jobs a month today, adding to the 10,000,000 lost over the last year. Everything (everyone’s economy and business’s too) that proceeded the July $147 a barrel peak price was based on using way too much credit to get by on. When the bubble burst, so did the global economy. A lot of money was made up to that point, but where did that money go today? All the run up in the cost of crude did was leave the world with higher prices for every single thing manufactured, shipped, barter or sold today.

Jul 19 09:38 AM