Is the stimulus package working?

Even though unemployment in the U.S. has hit 10.2% – America’s first double-digit unemployment rate since 1983 – the consensus of economists seems to be that the stimulus package is working:

Anyone see any reasons to disagree?

Can’t say that it sounds like a glowing endorsement. And given that the principal purpose of a stimulus package is to encourage the financial market to have trust in the system, things should have started looking up the moment the specifics of the proposal were announced. If you have to wait until money is finally arriving then it’s been a rather lackluster turnout.

And the problem with a lackluster turnout is that you could have had a much better success for much less money if you had a wiser plan to start with.

Also, the longer that it takes for things to pick up again, the harder it becomes to become the center of the world again. Becoming profitable again isn’t nearly as steep a hill to climb as maintaining our place as the economic leader of the world, nor is it nearly as vital.

:confused: Why is that vital?! Many countries are comfortable and prosperous without being “the economic leader of the world.” Who needs it?!

Global stability, mostly. Whether you believe that the US is the best leader of the free world or not, you’d still rather have a leader than not, and really we haven’t done all that bad. Certainly better than if China takes the place.

For example, consider this quote:

With all of Europe, the US, and everyone competing on an even keel, it becomes a race to get the greatest short term gains and drags everyone else down in making deals with one another.

The true definition of whether a stimulus packages ‘worked’ involves look at the economy after the entire episode has passed. Few people would argue that injecting a trillion dollars into the economy wouldn’t have some temporary, positive effect. The question is whether or not the positive effect and the multiplier that comes with it will be great enough to offset the anti-stimulative effects of the debt created by it.

The fact that with 1/3 of it spent it’s still questionable whether it had any positive effect at all is not a good sign. Let’s recap the administration’s claim about the effect of the stimulus: They said that with the stimulus, unemployment would not rise over 8%, and that this year would see net GDP growth of 1.8%, and next year it would be 3.6%, and in the ‘out years’ it would be over 4%. They also said 4 million jobs would be created ‘or saved’.

It now looks like the number of jobs created ‘or saved’ is very small - maybe a couple hundred thousand. Unemployment is over 10%. Most economists are now predicting a weak recovery, with growth under 2% for next year. These results are worse than the administration’s forecast for the economy without the stimulus.

Now, let’s fast-forward two years, when all the stimulus money has been spent. At that point, what happens to all the people in the jobs that were temporarily created if the stimulus doesn’t kick off a roaring recovery? And if the permanent cost of the borrowing is say 4%, how will it feel to be in the same position as now, with unemployment rising again, the economy going into a double-dip, and the government being saddled with an extra 30 billion dollars a year in debt servicing costs from the stimulus? That either pushes the deficit higher, or the government will have to hike takes by 30 billion a year.

This is exactly what happened to Japan. Its asset bubble collapsed, and the government tried to prop up collapsing demand with fiscal stimulus. It would help a bit temporarily, then the money would run and the economy would start to fall. So the government would borrow more, and spend more. The result was a debt equal to 160% of GDP, a moribund economy, a whole lot of useless overbuilt infrastructure, and a very bleak picture of Japan’s future.

There’s no doubt that there was a temporary lift each time Japan injected more money into the economy. But since it didn’t translate into a sustained recovery, it turned out to be an overall disaster. We’re currently in the period equal to Japan’s first attempt at a stimulus. We won’t know whether it was ‘successful’ until it’s fully played out.

As for the consensus view of economists, what I’d really like to see is a breakdown of the consensus by those who supported the stimulus and those who opposed it. Do the current results win over any former skeptics? Did they cause any former supporters to move to the opposition side? Or are these economists just looking for rationalizations for their own opinions?

BTW, next year the U.S. has to roll over 3 trillion in current debt, plus raise another 1.5-2 trillion to cover the budget shortfall. Which brings us to the biggest risk of the stimulus - what if the government can’t pay for it? What if the treasury auctions fail? The dollar is already declining in value.

The U.S. is heading into a sort of ‘coffin corner’ of deficit financing. If it can’t raise enough money, it will have to raise interest rates to attract it. If it raises interest rates, its debt servicing costs go through the roof. Then it will have to raise taxes, which will choke economic growth. If that happens, the stimulus will be anti-stimulative because it won’t be able to borrow from the future any more, and will only be fundable through current tax increases. That’s the equivalent of the ‘liquidity trap’ that rendered monetary policy ineffective.

About the only thing that is clear about the stimulus package is that no one knows
effect it is having*.

Besides the fact that they do not know if the reporting is correct, they cannot even agree on the numbers.

These are some quotes from Administration officials on the report about the effect of the stimulus:

So, the White House thinks that in a one day period the number of jobs created by the stimulus dropped by 360,000. Oh, and the report states that jobs were created in the 15th Congressional district of Arizona which, interestingly enough, doesn’t exist.


*Sorry for the wacky coding but if when I do links back they appear as one big link.

So? What should they have done instead?

Japan’s problems aren’t ours. We committed the same flawed thinking in trying to stimulate the economy, but what is wrong with our economy and what was wrong with theirs are not related. If you’re interested in Japan’s issues over the last couple of decades, I would suggest starting a separate thread if you want to stay on topic.

If we use the unemployment metric the Obama administration used to sell the stimulus package, it has failed miserably (background information).

Did you even bother to read the cite? It said, very clearly, that the job creation/save rate was on track for 3.5 million jobs, as promised.

I too wish they hadn’t been so optimistic, because we might then we could have gotten the bigger, more effective stimulus. I’m sure you were in favor of this, right?

As for what would have been more effective, the cite also had the following from someone on your side.

As for what Sam wants, I can only speculate based on the evidence that it is another depression and 25% unemployment.

You think stimulating the economy to fight a recession is something specific to only one country? This is hardly radical economics.

Whatever are you talking about? The stimulus package was to inject money into the system to stimulate demand. Given the performance of the stock market recently, I’d say that there is plenty of trust in the system. That is different from belief that demand will pick up enough to make hiring useful.

I agree, if they told the Republicans to sod off and put more money in spending and less in tax cuts to build support, it would have been better.

Say that Honda has just spent X bazillion dollars to take over China. Right as they do so, the economy collapses. Because of the recession, Honda can’t make back their investment this year and has to file for bankruptcy.

GM also goes belly up due to the collapse. However, they’ve been long on the decline, ready to go bankrupt at any moment. Their whole system of business and production is bloated and behind the times.

Now, I’ve got 2X bazillion dollars that I can split between the companies. What would you say are the odds that the simple act of handing over the money is going to cure both Honda and GM?

A rational plan would have been to tell everyone that nothing was wrong except that everyone had taken their money from the market and to put it back and get back to business, or better yet tell companies that they couldn’t fire anyone for six months, and the government would cover any losses.

The uproar about socialism/communism/naziism would pale to insignificance beside the uproar that would be raised if the government mandated that companies not fire anyone for six months.

shrug It’s the real solution, regardless. Nixon did similar stuff, and it worked for him. If there’s no underlying issue, losing the status quo just hinders the situation, it doesn’t help.

Spending a trillion dollars on throwing rocks through windows is certainly pointless. If you can think of actual areas of the economy where development would lead to future growth then sure, but otherwise, you’re better off to save your money and wait for things to come back on their own once everyone realizes that they’re panicking even though there’s nothing there to panic over.

Currently much of the developing world has higher growth rates than the United States. If this proves to be sustainable, would you recommend some sort of sabotage of their economies to keep the United States on top? Are you saying that you believe that a prosperous China, India or Brazil is a bad thing, and it is better to enforce a higher poverty level in these places to ensure United States dominance?

A number of Wall Street execs have assured me that it’s working just fine. In their own words, “You can take that to the bank.”

We can all relax now.

Economics does not work that way. Growth is easy when you’re poor; the rich countries have done a lot of innovation and technological development and you can copy a lot of that. When you get to an East Asia/Western Europe level of living, at ~80% of the US per capita GDP, then it’s a lot harder to grow fast.

Thousands of jobs were also created in NH’s 00 district…which also doesn’t exist. When it does, Grant Bosse wants to be the rep for it.