Economists See a Limited Boost From Stimulus
A report card on the stimulus plan offered by analysts nearly six months after it was passed by Congress suggests that the punch from increased government spending has helped the economy begin to bottom out faster than it would have otherwise. The tax cuts included in the plan, economists said, have had less of an impact because people tended to save the money or use it to pay down debt rather than spend it.
The effectiveness of the stimulus package has emerged as one of the most pressing concerns facing the White House. The government will release a jobs report on Friday that is expected to show that the unemployment rate ticked up in July from 9.5 percent in June, providing Republicans and conservative economists new ammunition to argue that the stimulus has been a waste of taxpayer money.
While there is a consensus that a fragile recovery is in the offing, the outlook remains murky. Still, analysts say the impact of the stimulus, while small, is discernible.
White House officials estimate that the stimulus program pumped about $100 billion into the economy through June. That was only a small share of the total projected spending, and much of the first wave came in the form of tax cuts, tax rebates and higher spending on safety-net programs like unemployment benefits and health care.
Private analysts say they think it added at least 1 percentage point to economic growth in the second quarter. That was not enough to prevent the economy from shrinking and joblessness from rising, but the pace of the decline slowed substantially compared with the first quarter.
“The signs of the stimulus are there,” said Allen L. Sinai, chief economist at Decision Economics, a forecasting firm in New York. “Government — federal, state and local — is helping take the economy from recession to recovery. I think it’s the primary contributor.”
But even supporters of the stimulus program say its contribution to a recovery so far has been smaller than White House officials had estimated.
For one thing, Mr. Obama’s stimulus program was only one component of a broader effort to combat the financial crisis. The Federal Reserve printed vast amounts of additional money, creating a raft of borrowing programs for financial institutions and businesses. It is in the process of buying up $1.25 trillion worth of mortgage-backed securities, a move that has pushed down mortgage costs for homeowners and new homebuyers. Meanwhile, the Federal Deposit Insurance Corporation has further subsidized lower borrowing costs for Wall Street firms and banks by offering federal guarantees on the bonds they issue.
“If you look at all the other things that have been happening, it’s hard to believe the stimulus program had that much direct effect,” said Donald Marron, a former economic adviser to President George W. Bush and a former director of the Congressional Budget Office.
Christina D. Romer, head of Mr. Obama’s Council of Economic Advisers, said on Thursday that the stimulus program had probably lifted economic activity by two percentage points or more in the second quarter.
“The fiscal stimulus that the administration worked with Congress to create was not only bold but well conceived,” Ms. Romer said in a speech to the Economic Club of Washington. “Government spending had to satisfy genuine needs and leave us with useful public investments.”
But direct government spending on infrastructure projects and other programs that create jobs immediately is only beginning to get under way. Much of the money so far has gone to people in the form of tax cuts and tax rebates, and consumers have tended to save that money rather than spend it.
Though it makes sense for people to increase their savings during times of heightened insecurity — especially for people who have lost large amounts of wealth as a result of falling home prices and falling stock prices — the heightened saving reduced the immediate impact of the tax cuts on economic growth.
Many economists have long argued that temporary tax cuts and rebates provide at most a transitory lift to consumer spending. That was the case with President George W. Bush’s tax rebate in early 2008, just after the economy had begun to contract. The economy briefly returned to growth in the second quarter of 2008, then began shrinking at steadily faster rates immediately afterward.
Consumer spending declined and consumer saving shot up during the first half of this year. After the government sent out $250 checks to Social Security recipients, the personal savings rate jumped to more than 5 percent.
Administration officials acknowledged that tax cuts deliver less bang for the buck than direct government spending. But tax cuts have the virtue of getting into the economy more quickly than money for new construction projects, because even “shovel ready” projects often take months to get started. They are also politically popular with Republicans and Democrats alike.
Administration officials and private analysts predicted that the stimulus program’s impact on the economy would increase in the months ahead, in part because the job-creating infrastructure projects would account for a bigger share of the outlays.
At the same time, many analysts predict, the economy itself will have hit bottom and begun to grow again. Home building and home prices, which had fallen for almost three years, appear to have almost no place to go but up. Even if the home building grows little or not at all for the next year, the mere fact that it is not falling will remove a big obstacle to growth.
The same is true for automobile manufacturing, which has been another primary cause of the shrinking economy. But the stimulus program has given car companies an added lift through the cash-for-clunkers program that offers rebates of up to $4,500 for people who trade in gas guzzlers for new cars. The Senate voted 60-37 on Thursday to spend $2 billion to extend the program.
All told, some forecasters predict that the stimulus program could lift economic growth by as much as three percentage points in the months ahead, allowing the economy to expand at an annualized pace of almost 3 percent by the last quarter of this year.
That hardly means that good times are right ahead. New estimates by the Commerce Department indicate that the United States economy shrank even more than originally thought in 2008 and through the first quarter of 2009. That means the country has to dig out of a deeper hole than originally thought, just to get back to its level before the recession began.
On top of that, recoveries in employment always lag well behind recoveries in economic growth. Administration officials and the Federal Reserve all predict that unemployment could climb above 10 percent and is not likely to start edging down until some time in 2010.