Issue Report: 2009 US economic stimulus

Is the 2009 US economic stimulus package a good plan to combat recession?

Toward the end of 2008 and in the beginning of 2009, the United States and global economies began to experience widespread recession. Multiple actions were taken to stimulate the economy in early 2008, late 2008, and in the beginning of 2009. In January 2009, President Obama proposed a roughly $800 billion stimulus package. In early February, both the US House of Representatives and Senate voted to pass modified versions of Obama’s stimulus plan, called the American Recovery and Reinvestment Act of 2009. Throughout this period, the nation and world engaged in a vigorous public debate on the merits of the plan, highlighting key philosophical differences in the United States and societies around the world on economic and social theory. Many questions have framed the debate. Can the government stimulate the economy? Or, is the government incapable of successfully intervening and managing the economy? What does history, particularly surrounding the New Deal’s impact on the Great Depression, reveal about the capacity of large spending programs to help end recessions? Is the stimulus package the right size, or is it too large, or event too small? Is the emphasis in the stimulus on spending appropriate, or do tax cuts provide better stimulus and deserve greater emphasis? Are the right kinds of stimulus included in the package? Is it appropriate, for example, to include longer-term spending projects, or does this fail to provide immediate stimulus? Does the stimulus include too much “pork” and room for wasteful spending? What are the consequences of inaction? Would it result in the next depression? Or is the government powerless to help in any case? Might the stimulus actually make things worse by adding to the national debt? Is the Buy American provision appropriate, or will its “protectionist” elements exacerbate the recession? Do the balance of pros and cons favor voting yes and passing the stimulus bill?

Government stimulus: Is the government generally capable of stimulating the economy?

Govt spending stimulates consumer spending, business growth

Martin Feldstein. "Defense Spending Would Be Great Stimulus". Wall Street Journal. December 24, 2008

“As President-elect Barack Obama and his economic advisers recognize, countering a deep economic recession requires an increase in government spending to offset the sharp decline in consumer outlays and business investment that is now under way. Without that rise in government spending, the economic downturn would be deeper and longer. Although tax cuts for individuals and businesses can help, government spending will have to do the heavy lifting.”

Majority of economists believe government can stimulate economy

Eugene Robinson. "Roll over the Republicans". Real Clear Politics. February 10, 2009

“Begin with the most fundamental question: Does the U.S. economy desperately need a massive stimulus, or not? There are economists who doubt it’s possible for the government to effectively stimulate an economy of such size and complexity. Those economists, however, are in the minority. […] The most respected economic wise men and women of both parties believe a huge stimulus is needed quickly to keep a dire economic situation from sinking into catastrophe.”

2009 US stimulus will create or save millions of jobs

Barack Obama. "We Can't Afford to Wait". February 9, 2009

“At [the] core [of the Recovery and Reinvestment Plan] is a very simple idea: to put Americans back to work doing the work America needs done. […] The plan will save or create three to four million jobs over the next two years. But not just any jobs – jobs that meet the needs we’ve neglected for far too long and lay the groundwork for long-term economic growth: jobs fixing our schools; computerizing medical records to save costs and save lives; repairing our infrastructure; and investing in renewable energy to help us move toward energy independence. The plan also calls for immediate tax relief for 95 percent of American workers.”

Stimulus will succeed with good management and supplemental action

The right set of spending, management, and supplemental action can ensure that the stimulus is effective. The stimulus package itself is only one part of the equation. Ensuring against no-bid contracts, enforcing transparency, and efficiently administrating the rapid expenditure of funds is very important. In addition, it is important to simultaneously shore up the financial system with a plan to fix the housing market and thaw the credit market. All these things must be done in concert in order for the stimulus to be effective.

Economic stimulus by government intervention always fails

Robert Higgs. "Instead of stimulus, do nothing - seriously". Christian Science Monitor. February 9, 2009

“Hardly anyone […] is asking the most important question: Should the federal government be doing any of this? […] Federal intervention rests on the presumption that officials know how to manage the economy and will use this knowledge effectively. This presumption always had a shaky foundation, and we have recently witnessed even more compelling evidence that the government simply does not know what it’s doing. The big bailout bill enacted last October; the Federal Reserve’s massive, frantic lending for many different purposes; and now the huge stimulus package all look like wild flailing – doing something mainly for the sake of being seen to be doing something – and, of course, enriching politically connected interests in the process.”

Stimulus spending violates principles of supply-side economics

Yaron Brook. "To Stimulate The Economy, Liberate It". Forbes. February 14th, 2008

“we must first recognize that the key economic activity that causes growth is not consumer spending but production. […] Economic growth means an increase in the amount of wealth that exists in a country–and all wealth must be produced. […] The focus of today’s stimulus packages on consumer spending is therefore completely backward. Consumption is a consequence of production. This fact is ignored by the Bush plan [and Obama plan], which attempts to achieve prosperity through $100 billion in deficit-spending. Though this might bring the appearance of prosperity, in the same way that an unemployed man appears prosperous if he goes on a shopping spree with his credit cards, the reality will be the opposite.”

Stimulus is from taxes or debt; injects no new money

Stimulus package spends money by first taxing it out of the economy or borrowing it through bonds. Either way, the money injected is not “new” money, but taken from the economy, so adds no new wealth to the economy.

New Deal did little-to-nothing to end the Depression

While many liberals claim that the New Deal helped stop the Great Depression, many other economists and historians argue that the New Deal only worsened the Great Depression by adding to the national debt.

Consumer confidence: Will the stimulus improve consumer confidence?

Stimulus is good for consumer and market confidence.

A stimulus package adds to consumer confidence by giving, at a minimum, the impression that things are going to be OK. As a result, it encourages businesses and consumers to spend more than they otherwise would, which has a positive effect on the economy.

2009 US stimulus won't generate consumer confidence

Chuck Jaffe. "Government's Stimulus Plan Won't Arouse Consumer Spending". Fox Business. February 3, 2009

“put on your consumer hat, look at the proposed stimulus bills, ideas and notions, and ask yourself if any piece of the legislation would make you positive enough about the economy and your personal financial situation to relax and feel good.”

Size: Is the size of the stimulus package appropriate?

Large stimulus is appropriate for large economic crisis

Scot Lehigh. "A large stimulus bill for large problems". The Boston Globe. February 6, 2009

“Is the stimulus plan large? Yes, and with good reason. Our economic problems are as well. With consumers poorer from $6 trillion in vanished housing wealth and $7 trillion in vaporized stock, we’re set to suffer annual losses in overall economic activity of a trillion dollars this year and a trillion or more next year. It’s not just consumer spending that has collapsed. Other traditional generators of economic growth – business investment, housing construction, and exports – are all anemic. […] That leaves government spending as the nation’s best hope for softening a major downturn.”[1]

Stimulus risks being too small not too large

Robert Kuttner, co-editor of The American Prospect. – Stimulus “needs to be adequate to do the job. Eight hundred and twenty billion is about 2.5% of GDP. But the economy is sinking at the rate of five to six percent. So they may find out they have to come back and ask for more.” Prominent economist Paul Krugman has also stated he believes that roughly $800b in economic stimulus is “too small”.[2]

$800 billion stimulus is just too massive.

A $800 billion stimulus package is the largest stimulus spending bill ever devised (although there have been some tax cuts that could be considered larger). For this reason, it should be viewed with great suspicion, and, at a minimum, the debate over the bill and areas of wasteful spending should done patiently. Rush such a large bill through Congress makes little sense.

Stimulus inadequate to impact massive US economy

Eliot Spitzer. "Robots, Not Roads". Slate. Jan. 5, 2009

“the capacity of even the U.S. government to affect the overall global economy is limited. Suppose the package is $800 billion over two years: $400 billion is less than 1 percent of the global economy and a mere 3 percent of the U.S. economy. In relative terms, $400 billion isn’t all that much more than the $152 billion spent on the 2008 stimulus, which had nary an impact on the economy.”

Growing government: Does US stimulus right/wrongly grow government?

Only about 10% of US stimulus goes to govt projects

Barack Obama. "We Can't Afford to Wait". February 9, 2009

“you may have heard some of the critics of our plan saying that it would create mostly government jobs. That’s simply not true. More than 90 percent of these jobs will be in the private sector. More than 90 percent.”

No evidence that stimulus supporters just want to grow government.

While it may be true that some supporters of the stimulus have a hidden agenda to grow government, this is mere speculation, and to oppose the legislation merely on this basis would be to overlook the broader, legitimate arguments involved in the debate.

US stimulus charts path to better government programs

Robert Kuttner. "Time to Think Big". American Prospect. February 10, 2009

“Looking forward [beyond the stimulus], we need a very different sort of economy, one that restores a balanced form of capitalism. At the core of this change is a long-term increase in public outlay, investing in areas vital to economic growth and social decency. […] An enhanced federal role, in turn, provides the moment to reclaim the public philosophy of activist government that effectively services people’s needs where market forces fail.”

Government is good; growing government with stimulus is not bad.

The idea that government is “bad” and that any growth in government engendered by the stimulus is subsequently “bad” is false. Government governs for the people and by the people. Unless one argues that the people are bad, government must be good. See Government is for an expansion on this argument.

Funding government projects will stimulate jobs/economy

Steven Pearlstein. "Wanted: Personal Economic Trainers. Apply at Capitol." Washington Post. February 6, 2009

“And then there is Sen. Tom Coburn (R-Okla.), complaining in Wednesday’s Wall Street Journal that of the 3 million jobs that the stimulus package might create or save, one in five will be government jobs, as if there is something inherently inferior or unsatisfactory about that. (Note to Coburn’s political director: One in five workers in Oklahoma is employed by government.)”

Stimulus will be used to grow govt bureaucracy

The spending in the stimulus will go toward many government programs, growing them so that they become a constant burden on tax payers and constraint for free markets. None of this is desirable, and this is why tax cuts are a better alternative; it provides stimulus without growing government, and in fact, shrinking government.

Mitt Romney. "Commentary: Stimulate the economy, not government". CNN. February 6, 2009

“These are extraordinary times, and like a lot of Republicans I believe that a well-crafted stimulus plan is needed to put people back to work. But the Obama spending bill would stimulate the government, not the economy. […] In the final analysis, we know that only the private sector — entrepreneurs and businesses large and small — can create the millions of jobs our country needs. The invisible hand of the market always moves faster and better than the heavy hand of government.”

Spending vs. tax cuts: Which provides a better economic stimulus?

Spending provides more economic stimulus than tax cuts

"Filling the hole". Economist. Dec 11th 2008

“Tax rebates or tax cuts will get more money into consumers’ hands quickly, but in today’s environment much of that boost will simply be saved, as people plug the holes in their finances left by the collapsing values of their houses and retirement portfolios, or just pay off debts. If consumers are unwilling to spend, the best way for a government to boost demand is to spend more itself. One approach is to send large dollops of federal cash directly to America’s struggling states”

Americans voted for progressive thinking of 2009 US stimulus

President Barack Obama – “The notion that tax cuts alone will solve all our problems; that we can ignore fundamental challenges like energy independence and the high cost of health care, that we can somehow deal with this in piecemeal fashion and still expect our economy and our country to thrive. I reject those theories, and so did the American people when they went to the polls in November and voted resoundingly for change.”[3]

Tax cuts provide better economic stimulus than spending

Jason Furman and Douglas Elmendorf of the Brookings Institution wrote, “Fiscal policy implemented promptly can provide a larger near-term impetus to economic policy than monetary policy can.”[4]

Immediate stimulus: Does the bill provide sufficient immediate stimulus?

Majority of US stimulus is immediate to fight recession now.

Jim Horney, director of federal fiscal policy for the Center on Budget and Policy Priorities – “The vast majority of what is in these two bills is pretty good stimulus.”[5] This includes “automatic stimulators”, such as unemployment benefits and food stamps, money that is typically quickly and fully spent. In addition, the majority of money will be spent within the first year of the stimulus package, providing more short-term, “good” stimulus to get the economy rolling quickly.

Longer-term spending is not "waste"; helps sustain stimulus

Steven Pearlstein. "Wanted: Personal Economic Trainers. Apply at Capitol." Washington Post. February 6, 2009

“Let’s review some of the more silly arguments about the stimulus bill, starting with the notion that ‘only’ 75 percent of the money can be spent in the next two years, and the rest is therefore ‘wasted.’ As any economist will tell you, the economy tends to be forward-looking and emotional. So if businesses and households can see immediate benefits from a program while knowing that a bit more stimulus is on the way, they are likely to feel more confident that the recovery will be sustained. That confidence, in turn, will make them more likely to take the risk of buying big-ticket items now and investing in stocks or future ventures.”

Much stimulus rightly goes toward long-term societal needs

Steven Pearlstein. "Wanted: Personal Economic Trainers. Apply at Capitol." Washington Post. February 6, 2009

“what’s striking is that supposedly intelligent people are horrified at the thought that, during a deep recession, government might try to help the economy by buying up-to-date equipment for the people who protect us from epidemics and infectious diseases, by hiring people to repair environmental damage on federal lands and by contracting with private companies to make federal buildings more energy-efficient.”

2009 US stimulus lacks short-term spending for immediate stimulus

John Norquiest. "Stimulus to Nowhere". Planetizen. January 22, 2009

“Spending projects will take years to get under-way. Is “Shovel-Ready” Enough? State bureaucracies claim to have thousands of “shovel-ready” projects. But examining the list of ‘shovel ready’ state projects at you find a list of decades-old freeway expansion proposals, large-scale projects that according to FHWA estimates, only 27% will be under construction within a year . Intimately familiar with the realities of transportation funding deployment, the nonpartisan Congressional Budget Office offered cautionary advice to the Appropriations Committee on just this point.”

Good/bad stimulus: Does the stimulus package contain mostly "good" stimulus?

Almost all government spending has some stimulus effect

Scot Lehigh. "A large stimulus bill for large problems". The Boston Globe. February 6, 2009

“Although one can debate the necessity or importance of various projects, almost any new spending will have a stimulative effect – including resodding the National Mall.”

Stimulus funding for unemployed ensures immediate spending

Barack Obama. "We Can't Afford to Wait". February 9, 2009

“this plan will provide for extended unemployment insurance, health care and other assistance for workers and families who have lost their jobs in this recession. […] That will mean an additional $100 per month in unemployment benefits to more than 450,000 Indiana workers, extended unemployment benefits for another 89,000 folks who’ve been laid off and can’t find work, and job training assistance to help more than 51,000 people here get back on their feet. […] That is not only our moral responsibility – to lend a helping hand to our fellow Americans in times of emergency – but it also makes good economic sense. If you don’t have money, you can’t spend it. And if people don’t spend, our economy will continue to decline.”

Stimulus lacks important tax cuts for wealthy/businesses

"The Stimulus Tragedy". Wall Street Journal (editorial). February 6, 2009

“Some Democrats claim these transfer payments are stimulating because they go mainly to poor people, who immediately spend the money. Tax cuts for business or for incomes across the board won’t work, they add, because those tax cuts go disproportionately to “the rich,” who will save the money. But a saved $1 doesn’t vanish from the economy, unless it is stuffed into a mattress. It enters the financial system, where it is lent to others; or it is invested in the stock market as capital for businesses; or it is invested in entirely new businesses, which are the real drivers of job creation and prosperity. […] At the current moment, amid a capital strike, the latter is the kind of fiscal stimulus we really need. Yet there is virtually none of it in the bills now moving through Congress. Senate moderates may succeed in cutting $100 billion or so in spending from the bill, which is political window dressing. Even they aren’t talking about adding the kind of tax cuts that would really help the economy now.”

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