Stimulus Success Unlikely; Inflation Looms

The stimulus package passed by Congress in February of this year to help get the economy back on track has taken something of a public-relations beating lately.

CBS News recently reported that stimulus funds had been sent to those who certainly didn't deserve them and weren't in any position to stimulate the economy--prison inmates.

Despite this embarrassment, there are some who think the stimulus package has helped save the day. After all, the stock market went on a tear this summer, and "green shoots" seem to be sprouting in the American economy lately as home prices stabilize, the increase in jobless claims slows and the dark mood that has hung over the economy starts to lift.

The dollars spent on the stimulus amount to just over half of 1 percent of GDP.

So, did the stimulus bill work? It's hard to tease out cause-and-effect perfectly, but it's not likely that it did. Here's why.

What we think of as the stimulus was the $797 billion spending bill, called the American Recovery and Reinvestment Act of 2009, passed by Congress and signed into law by President Barack Obama. Most economists agree that in order to have a stimulative effect, federal funds need to be spent quickly and injected into the economy as soon as possible. In an ideal world, the stimulus cash would have all been spent this year.

But that's not what happened. So far, a little more than 10 percent of the funds, $85 billion, have been spent.

That might sound like a lot of money, but consider it in the context of the enormous U.S. economy. American GDP is roughly $14 trillion per year. That means the dollars spent on the stimulus amount to just over half of 1 percent of GDP.

Imagine you make $50,000 a year and someone out of the blue gave you an additional $300 to spend. It would be nice, certainly, but it would be unlikely to profoundly alter your behavior going forward. The same goes for the American economy.

To be fair, it is extraordinarily difficult to spend large sums of money quickly. So a successful stimulus isn't as easy as it might first sound.

As my colleague Phil Levy has pointed out, "The (Obama administration) planners faced some tough choices. Tax cuts or direct transfers could get the money out more quickly, but the planners worried this money would just be saved, not spent. There is only so much money one can devote to extended unemployment insurance. Transfers to states were also fast, but seemed to reward the profligate."

Instead, most stimulus dollars are going to discretionary project spending--roads, bridges, energy infrastructure and the like. But these projects take time and lots of coordination. This helps explain why it will take until the end of 2010 for just half of the stimulus money to be spent.

That said, the federal government has taken lots of other steps that can be thought of as stimulative--bailing out or aiding troubled automakers, banks and insurance companies and other measures to prop up the economy. And some of these steps have indeed been massive. For example, the balance sheet of the Federal Reserve ballooned by more than $1 trillion during the economic crisis.

The American economy has been prodded, cajoled, poked, kicked and just about everything else you can think of by the government over the last year in an effort to keep it from falling apart. Perhaps some of the measures made sense. But the long-run worries from all of these activities are twofold.

The first is that such steps inject a large measure of uncertainty into the private sector as market actors wonder what the government might "do next."

As a result, they fail to invest or take risks while they wait for things to settle down and a clearer picture to emerge. In this way, government actions can be self-defeating by discouraging the very economic activity that policy-makers hope to kick-start.

The other worry is inflation. The Fed has pumped money into the economy and given assurances to Wall Street and Capitol Hill that, as the economy stabilizes, it will be able to keep inflation under control.

But only time will tell if it can.

Nick Schulz is the DeWitt Wallace Fellow at AEI and editor of The American.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Nick
Schulz

What's new on AEI

Poverty in America—and What to Do About It
image GDP for second quarter: Strong headline, weak innards
image Paul Ryan and the emerging conservative reform agenda in higher education
image Democrats' impeachment fixation
AEI on Facebook
Events Calendar
  • 28
    MON
  • 29
    TUE
  • 30
    WED
  • 31
    THU
  • 01
    FRI
Tuesday, July 29, 2014 | 10:00 a.m. – 12:00 p.m.
Is Medicare's future secure? The 2014 Trustees Report

Please join AEI as the chief actuary for Medicare summarizes the report’s results, followed by a panel discussion of what those spending trends are likely to mean for seniors, taxpayers, the health industry, and federal policy.

Friday, August 01, 2014 | 10:30 a.m. – 12:00 p.m.
Watergate revisited: The reforms and the reality, 40 years later

Please join us as four of Washington’s most distinguished political observers will revisit the Watergate hearings and discuss reforms that followed.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.