Squandered Stimulus

It's not surprising that the much-ballyhooed "economic stimulus" hasn't done much stimulating. President Obama and his aides argue that it's too early to expect startling results. They have a point. A $14 trillion economy won't revive in a nanosecond. But the defects of the $787 billion package go deeper and won't be cured by time. The program crafted by Obama and the Democratic Congress wasn't engineered to maximize its economic impact. It was mostly a political exercise, designed to claim credit for any recovery, shower benefits on favored constituencies and signal support for fashionable causes.

As a result, much of the stimulus's potential benefit has been squandered. Spending increases and tax cuts are sprinkled in too many places and, all too often, are too delayed to do much good now. Nor do they concentrate on reviving the economy's most depressed sectors: state and local governments; the housing and auto industries. None of this means the stimulus won't help or precludes a recovery, but the help will be weaker than necessary.

How much is hard to determine. By year-end 2010, the package will result in 2.5 million jobs, predicts Mark Zandi of Moody's Economy.com. But as Zandi notes, all estimates are crude. They involve comparing economic simulations with and without the provisions of the stimulus. The economic models must make assumptions about how fast consumers spend tax cuts, how quickly construction projects begin and much more.

Depending on the assumptions, the results vary. When the Congressional Budget Office made job estimates, it presented a range of 1.2 million to 3.6 million by year-end 2010. Whatever the actual figures, they won't soon mean an increase in overall employment. They will merely limit job losses. Since late 2007, those have totaled 6.5 million, and there are probably more to come.

On humanitarian grounds, hardly anyone should object to parts of the stimulus package: longer and (slightly) higher unemployment benefits; subsidies for job losers to extend their health insurance; expanded food stamps. Obama was politically obligated to enact a campaign proposal providing tax cuts to most workers—up to $400 for individuals and $800 for married couples. But beyond these basics, the stimulus plan became an orgy of politically appealing spending increases and tax breaks.

More than 50 million retirees and veterans got $250 checks (cost: $14 billion). Businesses received liberalized depreciation allowances ($5 billion). Health-care information technology was promoted ($19 billion). High-speed rail was encouraged ($8 billion). Whatever the virtues of these programs, the effects are diluted and delayed. The CBO estimated that nearly 30 percent of the economic effects would occur after 2010. Ignored was any concerted effort to improve consumer and business confidence by resuscitating the most distressed economic sectors.

Vehicle sales are running 35 percent behind year-earlier levels; frightened consumers recoil from big-ticket purchases. Falling house prices deter home buying. Why buy today if the price will be lower tomorrow? States suffer from steep drops in tax revenue and face legal requirements to balance their budgets. This means raising taxes or cutting spending—precisely the wrong steps in a severe slump. Yet the stimulus package barely addressed these problems.

To promote car sales and home buying, Congress could have provided temporary but generous tax breaks. It didn't. The housing tax credit applied to a fraction of first-time buyers; the car tax break permitted federal tax deductions for state sales and excise taxes on vehicle purchases. The effects are trivial. The recently signed "cash for clunkers" tax credit is similarly stunted; Macroeconomic Advisers estimates it might advance a mere 130,000 vehicle sales. States fared better. They received $135 billion in largely unfettered funds. But even with this money, economists at Goldman Sachs estimate that states face up to a $100 billion budget gap in the next year. Already, 28 states have increased taxes and 40 have reduced spending, reports the Office of Management and Budget.

There are growing demands for another Obama "stimulus" on the grounds that the first was too small. Wrong. The problem with the first stimulus was more its composition than its size. With budget deficits for 2009 and 2010 estimated by the CBO at $1.8 trillion and $1.4 trillion (respectively, 13 and 9.9 percent of gross domestic product), it's hard to argue they're too tiny. Obama and congressional Democrats sacrificed real economic stimulus to promote parochial political interests. Any new "stimulus" should be financed by culling some of the old.

Here, as elsewhere, there's a gap between Obama's high-minded rhetoric and his performance. In February, Obama denounced "politics as usual" in constructing the stimulus. But that's what we got, and Obama likes the result. Interviewed recently by ABC's Jake Tapper, he was asked whether he would change anything. Obama seemed to invoke a doctrine of presidential infallibility. "There's nothing that we would have done differently," he said.

© 2009