Why Isn't the Stimulus Stimulating?

by: Mark J. Perry

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.

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.