Stimulus: How to Know If It’s Working

February 11, 2009

BUSINESS WEEK

Consumer confidence and job creation may be slow to emerge and hard to measure, but boosts in umemployment benefits and food stamps will be fast acting

By Moira Herbst

bama1At his first prime-time press conference, President Obama was asked a central question about the $800 billion-plus economic stimulus package: How will Americans know if it’s working? “My initial measure of success is creating or saving 4 million jobs,” Obama answered.

That was on Feb. 9, a day before the Senate passed an $838 billion version of the bill by a vote of 61-37, following the Jan. 28 passage of an $819 billion version in the House. The House and Senate have begun negotiations to reconcile the measures, which Obama would like to sign into law by Feb. 16, the federal Presidents’ Day holiday. When people have a job, Obama explained, they purchase and invest, allowing companies to do the same and, in turn, to hire more workers as business expands.


Indicators of Success

Yet while job creation is arguably the most important goal of the stimulus package, other parts of the bill will have a much more immediate and visible impact. Food stamp increases and extensions of unemployment benefits will be among the first noticeable effects of the package. Tax credit payments for individuals and families would follow, along with other tax breaks and incentives. Rising consumer confidence and lower unemployment will be far more gradual, and aren’t likely to surface until late 2009 at the earliest.

There’s an understanding among many economists that the sooner a government intervenes in an economic crisis, the more effective it tends to be in getting the economy back on track. That doesn’t mean that precise measurement of success is easy, however. “The problem is, we don’t know what trajectory the economy would take without the stimulus package,” says J. Bradford DeLong, an economics professor at the University of California-Berkeley. “We can’t enter a Star Trek-like divided universe in which we compare what’s happening with the stimulus versus without it. It’s hard to precisely judge its impact.”

DeLong says that looking at interest rates will provide a clearer idea of whether the stimulus plan is working. “If interest rates stay extremely low, the plan is definitely working,” he says. “If Treasury interest rates do start to rise by more than normal levels, then we worry that [the spending] is crowding out private economic activity and discouraging investment.” Specifically, he says that if medium- to long-term Treasury bond interest rates climb two or three percentage points higher in the next year and inflation sets in, the stimulus package is not having its intended effect.

Swift Help for the Neediest

Of course, how one benefits from the stimulus package depends on several factors, including income, professional skills, and where you live. “What you’ll see [in benefit] and when you see it depends on who you are,” says Steve Ellis, vice-president at Taxpayers for Common Sense, a taxpayer advocacy group. “If you are living hand-to-mouth, you should have greater access to food stamps and other assistance right away. If you’re employed and not doing as well but hanging on, you won’t see much change unless a [federally funded] construction project starts up nearby. For them, the government hand will be less visible and less direct.”

Direct assistance for the poor and unemployed, considered as among the most effective stimulus measures, will be the first to take effect. Both the House and Senate bills offer an additional $20.2 billion to extend emergency unemployment benefits for more than 3 million people whose state benefits are set to run out after March. They also offer an extra $25 a week in jobless benefits to millions of workers through the end of the year; the current average weekly benefit is $293.

The packages also would give $7 billion to states that adopt reforms that make it easier for part-time workers, low-wage earners, and women to qualify for benefits. The proposals vary in the amounts by which they would increase food stamp benefits and additional medical assistance for low-income, unemployed workers under Medicaid, but both include spending for these items. An additional $17 billion in the stimulus bills would boost the maximum Pell Grant for higher education by $400 per applicant and provide other financial aid. Along with extended benefits, the unemployed may start to see shorter lines at the unemployment office. Both stimulus bills give states $500 million to help process unemployment applications, which have been overwhelming state systems across the country.

Tax Credits and State Aid

Working and middle-income Americans will benefit from the $82.1 billion in tax credit payments the plans offer. The House plan would give individuals earning up to $75,000 a year a tax credit of $500 and couples earning up to $150,000 a year a tax credit of $1,000. (The Senate bill lowers the income cap to $70,000 for individuals and $140,000 for couples, which critics say would reduce the stimulus effect.) Taxpayers can receive this credit either by claiming a credit on their 2009 and 2010 tax returns or by reducing their withholding from their paychecks. Other tax incentives to encourage auto and home purchases, included in the Senate bill, would be experienced by consumers at the time of purchase.

Later this year, the effects of other spending will become more visible. The bills offer states tens of billions in “state stabilization” money, to fund grants for education and to patch holes that have emerged in many state budgets. (The House bill sets aside $79 billion in state stabilization funds, the Senate bill cuts that to $39 billion.) Another $3 billion is earmarked for state and local law enforcement.

In the meantime, the stimulus plans are expected to create or save jobs in various sectors of the economy. The nonpartisan Congressional Budget Office estimated that the House version of the bill would create between 1.3 million and 3.9 million jobs by the end of 2010. While police officers and teachers might feel the effect immediately, other workers would find jobs later this year on such projects as modernizing electrical grids, building highways, and weatherizing federal buildings.

Metrics May Prove Elusive

Mark Zandi, chief economist at Moodys.com (MCO), says that if the package works according to Washington’s plan, unemployment insurance claims should start to drop in the summer and continue through the fall. He warns, however, that the unemployment rate will be slower to fall because layoffs will offset some of the gains. Some economists say that even as the unemployment rate does begin to fall, it will be hard to measure what would have happened without the economic stimulus plan.

The stimulus is likely to provoke heated “Did it work?” debates for years to come among politicians, economists, and the public. “We are throwing a rock into our nation’s economic pond, and the ripple effects will spread throughout the economy,” says Ellis of the taxpayer group. Still, he says the impact might be more muted than many would hope: the annual U.S. gross domestic product is $13 trillion, while the stimulus package is about $900 billion over several years. Says Ellis: “It’s a big rock, but it’s a very big pond.”

Herbst is a reporter for BusinessWeek in New York.

Numerous Myths and Falsehoods Advanced by the Media in Their Coverage of the American Recovery and Reinvestment Act

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Media Matters for America previously identified numerous myths and falsehoods advanced by the media in their coverage of the American Recovery and Reinvestment Act. As debate on the bill continues in Congress, other myths and falsehoods advanced by the media about the recovery package have risen to prominence. These myths and falsehoods include: the assertion that the bill will not stimulate the economy — including the false assertion that the Congressional Budget Office (CBO) said the bill will not stimulate the economy; that spending in the bill is not stimulus; that there is no reason for stimulus after an economic turnaround begins; that corporate tax rate cuts and capital gains tax rate cuts would provide substantial stimulus; and that undocumented immigrants without Social Security numbers could receive the “Making Work Pay” tax credit provided in the bill.

1. The bill will not stimulate the economy

In a February 1 article, The Associated Press reported an assertion by Senate Minority Leader Mitch McConnell (R-KY) that the recovery bill will not stimulate the economy without noting that the CBO disagrees. ABC World News anchor Charles Gibson echoed this assertion during his February 3 interview with President Obama, stating: “And as you know, there’s a lot of people in the public, a lot of members of Congress who think this is pork-stuffed and that it really doesn’t stimulate.” Additionally, on the January 28 edition of his show, nationally syndicated radio host Rush Limbaugh allowed Rep. Eric Cantor (R-VA) to falsely claim of the bill: “Even the Congressional Budget Office, controlled by the Democrats now, says it is not a stimulative bill.” Fox News host Sean Hannity repeated this claim on the February 2 broadcast of Fox News’ Hannity, asserting that the CBO “say[s] it’s not a stimulus bill.”

In fact, in analyzing the House version of the bill, H.R. 1, and the proposed Senate version, the CBO stated that it expects both measures to “have a noticeable impact on economic growth and employment in the next few years.” Additionally, in his January 27 written testimony before the House Budget Committee, CBO director Douglas Elmendorf said that H.R. 1 would “provide massive fiscal stimulus that includes a combination of government spending increases and revenue reductions.” Elmendorf further stated: “In CBO’s judgment, H.R. 1 would provide a substantial boost to economic activity over the next several years relative to what would occur without any legislation.”

2. Government spending in the bill is not stimulus

Several media figures, including CNN correspondent Carol Costello, CBS Evening News correspondent Sharyl Attkisson, and ABC World News anchor Charles Gibson, have all uncritically reported or aired the Republican claim that, in Gibson’s words, “it’s a spending bill and not a stimulus,” without noting that economists have said that government spending is stimulus. Indeed, in his January 27 testimony, Elmendorf explicitly refuted the suggestion that some of the spending provisions in the bill would not have a stimulative effect, stating: “[I]n our estimation — and I think the estimation of most economists — all of the increase in government spending and all of the reduction in tax revenue provides some stimulative effect. People are put to work, receive income, spend that on something else. That puts somebody else to work.” Additionally, Dean Baker, co-director of the Center for Economic and Policy Research, has said, “[S]pending is stimulus. Any spending will generate jobs. It is that simple.”

3. There is no reason for stimulus after a turnaround begins [Read more…]

There’s a New Sheriff in Town and He’s Not Wearing a Cowboy Hat

lilly

You know you can whine all day about the idea that no matter what President Obama does in the next couple of years- we’re all in for some rough times- and you’d be right.

But there’s just no accounting for the feeling an American citizen gets after a day like today- miserable, pissed off and yet hopeful that at last, someone is Finally in charge.

The very first bill that President Barack Obama signed into law protects American workers on a day that unemployment benefits climbed to a record number of claims. Lilly Ledbetter worked alongside her male Goodyear plant supervisors for twenty years making less money because she was a female. She stood behind the President as he signed the legislation.

Mrs. Obama, who made her first public comments since becoming First Lady said: “She knew unfairness when she saw it, and was willing to do something about it because it was the right thing to do — plain and simple,”

The President explained that he wanted his daughters to be treated equally and valued for their talents in the workplace.

Later in the day he met with Vice President Biden amd Treasury Secretary Geithner and then addressed the press about the report that Wall Street bonuses are the same as 2004.

Barack Obama leaned forward in his gold and blue striped antique chair and ripped in to Wall Street:

“Shameless”

“There will be times for them to make profits and there will be time for them to get bonuses — now is not that time,” Obama said. “The American people understand that we’ve got a big hole that we’ve got to dig ourselves out of, but they don’t like the idea that people are digging a bigger hole even as they’re asked to fill it up.”

It’s nice to have a living, working brain back in the Oval Office.

JT

Bill Maher | March 7 2008 | Complete Show + New Rules

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