June update: "Stimulus package" still not very stimulating

February 17, 2009: President Obama signs $787-billion stimulus bill into law

Way back on February 17, after weeks of often bitter wrangling on Capitol Hill over what would and would not make it into the huge package, President Obama signed the final "stimulus bill" into law.

Like a lot of other observers, I had written (here and here) during those weeks of Congressional bickering, logrolling and gross partisanship that the emerging stimulus package was not very stimulating. I was right -- and after four months, I can say that it's still not very stimulating.

I had no issue with deploying fiscal stimulus -- i.e., deliberately increasing federal deficit spending to put more dollars into circulation -- as a matter of policy to help jump start an economy in recession. And I was not bothered much by the high price tag. What concerned me was that the plan did not meet any of the three standards set by Obama's own top economics advisor, Larry Summers: namely, that it be timely (the money should go out “almost immediately,” in Summers' words); targeted mainly to help low- and middle-income people; and temporary, defined by Summers as not raising deficits “beyond a short horizon of a year or at most two.”

The Congressional Budget Office warned bluntly that key portions of the bill passed first by the House would not be spent anytime soon. Some adjustments were made in the Senate, particularly to attract support from a few Republicans and moderate Democrats, but the final bill was still extremely heavy on pet projects -- some worthy on their own merits, to be sure -- that Congress or the Administration wanted to fund, regardless of whether they provided any effective fiscal stimulus to the overall economy.

Four months down the road, it has now become clear that the $478 billion in direct federal spending provided in the bill is trickling out very slowly, too slowly to have a noteworthy impact on a still-crippled economy. In fact, through the middle of June, only a paltry $53 billion, or 11%, of that dough has actually gone out the door and into any body's pockets. The biggest part of that $53 billion is accounted for by Social Security and Health and Human Services. Many agencies have spent only 1-3% of the money allocated to them.

In sharp contrast, the roughly $300 million in tax cuts that made up the rest of the stimulus package has flowed nicely and quickly out the door and into people's pockets. There was a great deal of malarkey tossed around in January and February about why spending was preferable to tax cuts as a way to drive the deficit and, thus, stimulate.

One knock against tax cuts was that a dollar in spending typically triggers a bigger "multiplier effect" as it ricochets through the economy. While that's true, the multiplier is zero if the money just sits in the Department of Transportation's account. Another was that tax cuts would somehow wind up mostly helping the rich and wealthy corporations. Of course, that depended on the nature of the tax cut. The cut that could have been implemented in the most timely and effective way to boost the incomes of those most likely to spend was a payroll tax "holiday." That would have had the added virtue of being easily managed and temporary (i.e., extended by periods of some months at a time, depending on economic conditions).

So the "stimulus" has had a minimal effect, if any, on the economy so far. To be sure, the pace of spending will pick up as we roll into the fall, and the lion's share of the remaining money will flow during 2010 (although not all of it, since a sizable chunk won't be spent until 2011). But meanwhile, the economy has continued to crawl along, and unemployment has risen to to a new high of 9.4% -- considerably above the rate projected by the Obama Administration earlier this year.

A huge opportunity has been missed to deliver a major stimulative jolt to the sagging economy -- and there won't be another. Although some liberals are already talking about a need for a second "stimulus package," that's simply not going to happen. Obama's "honeymoon" period is over. While people generally still like and respect him and are willing to give him a great deal of latitude, opposition to many of his specific policies has coalesced and public anxiety about runaway federal spending will block any attempt to revisit the stimulus idea.

What's your opinion? Post a comment.