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The Status of the Stimulus Plan

I was supposed to be a guest on the Today Show earlier this week to speak about job-hunting, specifically the effects on jobs of the stimulus package—the American Recovery and Reinvestment Act of 2009. But I had to bow out because I came down with a wretched cold. My family followed me as I went through all the Kübler-Ross stages of denial, anger, and so forth, until I had to accept the fact that I was not well enough to appear.

So I’m using today’s blog to take stock of the current state of the stimulus package. (How’s that for a lot of luscious alliteration?) When I wrote a book about the plans for the stimulus, Great Jobs in the President’s Stimulus Plan, I did not have access to many details about the legislation. And now, even though the law has been in effect for several months, economists have few tools for gauging its effects.

This lack of useful data has given rise to a lot of sniping from politicians and pundits who oppose the stimulus. Here is a fairly mild example, from an Associated Press story that ran in mid-May: "Models that predict the number of U.S. jobs with and without the stimulus still conclude that the bill will create or save 3.5 million by the end of 2010, the report says. Economists who study job creation say the administration will need some creative math to reach that goal. That's because Obama has lumped 'jobs saved' with 'jobs created.' Even economists for organizations that stand to benefit from the stimulus concede it probably is impossible to estimate saved jobs because that would require calculating a hypothetical: how many people would have lost their jobs without the stimulus."

The writer seems to resent the lumping-together of jobs saved with jobs created, but it would be very difficult to untangle these two phenomena. If stimulus money is available to pay for road resurfacing and a contracting company gets the work, the employer may either take on new workers or avoid planned layoffs. The former is easy enough to measure, but the latter, being the absence of an event, is harder to detect. The saving of jobs may have an effect on unemployment figures, but keep in mind that these figures are based on the number of people seeking work, so they are notoriously subject to upward or downward swings based on the optimism or despair of out-of-work people.

What’s really odd is that the most partisan commentators talk as if the lack of a good metric somehow proves the futility of the stimulus plan. I have to wonder what course of action they would prefer as an alternative. The most logical way to fashion a stimulus that consists entirely of new jobs would be to create a lot of government jobs, such as the Civilian Conservation Corps did in the 1930s, but that would be anathema to conservatives. Ironically, the saving of jobs comes about because the Obama stimulus plan injects funds primarily into the private sector.

I also should point out that the saving of a job is, in some ways, better than the creation of a new job. A saved job avoids severance payments and unemployment benefits, which drain corporate budgets and state coffers. The money from these payments to laid-off workers is also less likely to circulate rapidly through the economy; from my own experience of a downsizing, I can assure you that people spend this money much more cautiously than money from a paycheck. Preservation of a job also avoids psychological costs, which are profound even if they are harder to measure than monetary costs.

Perhaps the main drawback of preserving a job rather than creating a new one is that a new job is more likely to involve up-to-date technologies and skills that will move our economy toward greater competitiveness. However, in this regard it’s worth remembering that many initiatives funded by the stimulus package, from alternative energy to smart grids to biomedical research, are aimed precisely at these new technologies and skills.

In conclusion, it’s difficult to measure the impact of the stimulus plan, but that’s true for some other government expenditures. Consider our huge expenditures on national defense and homeland security. Although we can point to some events that indicate the efficacy of these expenditures, such as a successful military campaign or the thwarting of a known terrorist plot, most of the accomplishments of these two cabinet-level departments consist of nonevents—attacks that never happened and that we will never know were a possibility. I wonder when conservative pundits will start demanding metrics for these expenditures.

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  • Laurence Shatkin

    Thanks for your comment, James. I particularly liked this part: "Perhaps more fundamental for long-term economic recovery, given the areas of investment of the stimulus package (infrastructure, energy and green jobs, education. etc.), it is the type of government investment required for renewing long-term economic growth." I've written a book, "200 Best Jobs for Renewing America" (presently in press), that looks at the high-paying and high-growth occupations in those particular sectors of the economy, plus a couple of others, such as advanced manufacturing. The stimulus package and the subsequent budget are aimed at redirecting the economy toward a sustainable and competitive 21st-century economy.

  • James Aluceo


    The stimulus plan in of itself has halted the dramatic plunge in business and consumer confidence with the very likely threat of an economic depression earlier in the year, and businesses and consumers taking a less weary and more upbeat attitude to the future. Maybe more than anything else this will be the most significant impact of the stimulus package in the long-run enabling a spectacular recovery from the real possibility of depression before its passage. Businesses and consumers have become more and more confident that spending from the stimulus in the upcoming months will provide a solid environment for economic activity thus encouraging investment, reducing the pace of job losses and encouraging consumer spending. In other words, the stimulus package has avoided “a cycle of economic downturn to depression” and is now about to engender “a cycle of economic upturn to recovery”.

    The stimulus package cash handouts and other social initiatives have played no minor part in lessening the burdens on individuals of the economic downturn and the consequent increase in the number of people unemployed thus palliating the effects with regards to mortgage, health coverage and consumer spending.

    The stimulus package has halted the lost of jobs in the areas of education and other state level services and enabled States to avoid budget bankruptcy (caused by the fall in revenues due to the economic downturn) with the result of avoiding indirect job losses in the private sector as well.

    The stimulus package is bound to lead the way for new jobs creation to be followed suit by direct private sector investments with the consequence of increasing spending in the economy and accelerating economic recovery. It should be noted that jobs created by the stimulus will have a multiplier effect in the creation of jobs by private enterprises.

    Perhaps more fundamental for long-term economic recovery, given the areas of investment of the stimulus package (infrastructure, energy and green jobs, education. etc.), it is the type of government investment required for renewing long-term economic growth. As was the case with FDR's New Deal in the 1930s and Eisenhower building of interstate highways and investment in the sciences in the 1950s, the stimulus package is bound to restructure the foundation of the US economy within which private enterprise will thrive.

    The fundamental element in the criticisms levied against the stimulus package that it will increase the US deficit is the total disregard by most critics of what would have happened without the stimulus with respect to avoiding the real threat of a depression, raising business and consumer confidence and restructuring the economy. Thus providing a good foundation for real growth in the long-run (boostered by the Stimulus and led by private enterprise) with economic growth by itself and healthcare reform allowing for deficit reduction in the long-run.

    While the Stimulus Package has often come under this one-sided criticism of increasing the US deficit, such an argument can only be credible to the extent that it elicits how the results mentioned above which have been obtained (and are to be obtained) by the Stimulus Package could have been attained otherwise. Most critics of the stimulus package seem to think that this economy which was at the very brink of collapse simply avoided a depression by some miracle and that by the same token recovery is bound to occur by magic. To the extent that their arguments fail to answer these fundamental facts about avoiding a depression and beginning a recovery, to that extent, such arguments can hardly be considered credible.

    Actually, the initial impact of the stimulus for private enterprise and consumer confidence has been “anticipatory” in that it arrested a situation where the trend of business and consumer confidence was heading the economy to a depression. That is why the statistics point to the fact that business and consumer confidence stop plunging after the stimulus plan was passed and the stock market has been “going north” since then. It is the anticipation of the impact of the stimulus plan that has stabilized business and consumer confidence, heading off the real prospect of a depression. In other words, the stimulus package first impact was to act as the brakes for an economy that was heading to a depression disaster. See link above for the effect of the stimulus plan on the stock market immediately after its passage in mid-February 2009: the NASDAQ, Dow Jones and S & P 500 have made a dramatic U-turn upward since March 2009.

    The reason for the high job losses is very simple. Those jobs were going to be lost anyway as business and consumer confidence entered a vicious cycle to depression following the failure of the financial system - these job losses arose out of lack of confidence in the financial system. Actually, the stimulus role at the onset more than any immediate spending in the economy itself has been to provide assurance to consumers and businesses that government will spend in the economy thereby upholding consumer and business confidence and avoiding the real prospect of a depression. So the stimulus first role has been "anticipatory" in forestalling a depression.

    Believe it or not, it is not out of the question that without the stimulus plan we might have been talking now about the loss of not 1.6 million jobs but 5 or 6 million jobs at the trend at which consumer and business confidence went on falling before its passage. See link on the rise of consumer confidence since the stimulus plan was passed in mid-February 2009.

    Actually, the word "stimulus" here can be misleading in that it underemphasizes the effect of the stimulus in arresting a grave and downward spiral of the economy and rather draw focus mainly on creation of jobs which is the second and yet to fully come dimension of its impact.

    Let's imagine that the stimulus plan was to be suspended now. What will happen is that the anticipation consumers and business had about its boosting effect on the economy will die out, and this of itself will create uncertainty and may well lead to a new downward spiral. The Stimulus has a double effect with respect to recovery and job creation. Perhaps the lesser acknowledged effect is the confidence created in the economy for private enterprise and consumer consumption. In fact, this indirect effect will be the strongest push for economic recovery and job creation. Then there is the direct effect of the Stimulus Package spending and its multiplier effect given the areas of expenditure (education, infrastructure, green jobs, etc.)

    While critics are pointing to the fact that unemployment is already at 9.4 percent compared to the prediction of 8.8 percent for 2010 made by the Administration, many forget that Economics like Meteorology or Earthquake Prediction for that matter is "no Physics or Maths". What ultimately matters is the bigger picture and trends. Going by the job loss figures for March, April and May (652000, 504000 and 345000 respectively) the argument made by the administration definitely holds. In fact, the Fed, the Treasury as well as other institutions involved in the prediction of economic data tend to revise their figures quite often. What matters is the trend and bigger picture. See link

    The Stimulus is rather like a project but in this instance a massive and complex national project. A project can be broken down in two broad categories: design and execution. At the design stage (the first few months of the Stimulus), everything is being organised and put in place administratively with relatively little being carried out. The upcoming months will be the period when the massive spending and investments will be executed at an exponential rate. In fact, 1 billion dollar is already being allocated each day for Stimulus projects.

    In layman’s terms, the Stimulus is needed for the simple reason that with the failure of the financial system, businesses and consumers were less willing (uncertainty) and less able (banks failures and failure to provide credit) to produce and spend in the economy implying that companies sold less goods and services than usual and so the companies had to lay out workers who in turn bought less and so the cycle goes (and this might just as well have led to a depression).

    What the stimulus is meant to do, and is doing, is to incite and give businesses and consumers the confidence to keep on producing and spending respectively for the upcoming spending in the economy it is to generate exponentially. Initially by giving tax breaks, benefits, spending to maintain teaching and social services jobs and then spending on stimulus projects contracts given to companies which are then encouraged not to lay off workers. All these with the consequent multiplier effect in the economy.

    Companies and consumers effectively bought to this idea once the Stimulus bill was enacted and kept on producing and consuming respectively in anticipation that upcoming Stimulus spending will maintain a stable economic environment from which recovery is possible. Hence the reason why the stock market and consumer and business confidence started rising. This effort was accompanied by the bank bailout and efforts to provide credit to consumers and companies.

    It is effectively because the Stimulus Package is real, a commitment of 787 billion dollars by the US government for real economic projects, that consumers and businesses bought to the scheme and started acting in a positive manner in anticipation of its positive impact in the upcoming months (the Stimulus Package direct impact should enter in full force by the fourth quarter). In fact, many economists have even argued that the amount provided for the Stimulus should have been much more higher.

    I’ll argue that irrespective of party creed, it will seem to me that the criticism levied against the Stimulus is much more of a “political vogue” (and has nothing to do with “realistic” economics) naïvely taken up by the media which tend to operate on the basis of “two sides to any story” (not a criticism though). The milestone which any such critical arguments has to overcome is to answer the question: how could a depression be avoided and a recovery started following the failure of the financial system?

    The stimulus is rather the impetus for the overall economic agenda advanced by the Obama Administration and is meant to arrest the downward spiral of the economy and create a new basis on which the the US economy will be rebuilt for the upcoming years (not only the next 2 years).

    The goal here is to move away from an economic model which has been based on speculation and credit indebtedness as was the case in the last few years (following the deregulatory policies started during the Clinton Administration) culminating into the mortgage crisis and the failure of the financial system.

    The Obama Administration’s economic model is meant to refocus the economy on real growth. The government will provide the impetus for the new economic model by initiating policies meant to: better regulate the financial system to encourage real/productive and not speculative enterprise, reign on the culture of credit indebtedness (by enterprises and individuals), revamp education (for a more competitive economy based on a better qualified workforce), bring about a more energy efficient and independent economy with green jobs, bring down health care costs in order to lessen the burden on individuals and enterprises and provide universal coverage, and finally control deficits through economic growth and reigning down on health care costs (with pay-as-you-go as the future approach to public spending).

    You will certainly notice that the stimulus spending is more or less continuous with this economic agenda.