Judged by his own standards, President Obama's $787 billion economic stimulus program, which he signed into law last week, is deeply disappointing. For weeks, Obama has described the economy in grim terms. "This is not your ordinary, run-of-the-mill recession," he said at his Feb. 9 press conference. It's "the worst economic crisis since the Great Depression." Given these dire warnings, you'd expect the stimulus package to focus exclusively on reviving the economy. It doesn't, and for that, Obama bears much of the blame.
The case for a huge stimulus, which I support, is that it's insurance against the possibility of a devastating downward economic spiral. Spending and confidence are tumbling worldwide. In the fourth quarter of 2008, the U.S. economy contracted at a nearly 4 percent annual rate. In Japan, the economy fell at a nearly 13 percent rate; in Europe, the rate was about 6 percent. These are gruesome declines. If the economic outlook is as bleak as Obama says (and it may be), there's no reason to dilute the upfront power of the stimulus. But that's what Obama's done.
His political choices compromise the program's economic effectiveness. Let's start with the numbers. The Congressional Budget Office (CBO) estimates that about $200 billion will be spent in 2011 or later—well beyond when it will do the most good. For starters, there's $8 billion for high-speed rail. "Everyone is saying this is [for] high-speed rail between Los Angeles and Las Vegas—I don't know," says Ray Scheppach, executive director of the National Governors Association. Whatever project or projects are chosen, the decision process, design and construction will occupy many years. It's not quick stimulus.
Then there's $20.8 billion for improved health-information technology—more electronic records and the like. Probably most people regard this as desirable, but here, too, changes occur slowly. The CBO expects only 3 percent of the money ($595 million) to be spent in fiscal 2009 and 2010. The peak year of projected spending is 2014 at $14.2 billion. Or consider the $5.8 billion in outlays for water-treatment plants. The CBO reckons that only 27 percent will be spent in 2009 and 2010.
Big projects take time. The reason they're included in the stimulus is that Obama and Democratic congressional leaders decided to use the legislation as a way of advancing many political priorities instead of just spurring the economy. At his press conference, Obama argued (inaccurately) that the two goals don't conflict. Consider, he lectured, the retrofitting of federal buildings to make them more energy-efficient. "We're creating jobs immediately," he said.
Yes—but not many. The stimulus package includes $5.5 billion for overhauling federal buildings. The CBO estimates that only 23 percent of that would be spent in 2009 and 2010.
What's worse, the economic impact of the stimulus is already much less than advertised. The final package includes an obscure tax provision: a "patch" for the alternative minimum tax (AMT). This protects many middle-class Americans against higher taxes and, on paper, adds almost $85 billion of "stimulus" in 2009 and 2010. One problem: "It's not stimulus," as Len Burman of the nonpartisan Tax Policy Center says. "[Congress was] going to do it anyway. They do it every year." Strip out the AMT, and the stimulus package drops to about $700 billion, with almost 30 percent spent after 2010, by the CBO's analysis.
The central purpose of the stimulus is to prevent, or minimize, declines in one part of the economy from dragging other sectors down. We want to stop a chain reaction. The next big vulnerable sector seems to be state and local governments. Weakening tax payments create massive budget shortfalls. From now until the end of fiscal 2011, these may total $350 billion, says the Center on Budget and Policy Priorities (CBPP), a liberal research and advocacy group. Other estimates are somewhat lower, but it's clear that states—required to balance their budgets—face huge pressures to cut spending and jobs or raise taxes. All would worsen the recession and, presumably, deepen pessimism.
Yet, the stimulus package offers only modest relief. Using funds from the stimulus, states might offset 40 percent of their looming deficits, says Nicholas Johnson of the CBPP. The effect on localities would probably be less. Congress might have done more by providing large, temporary block grants to states and localities and letting them decide how to spend the money. Instead, the stimulus doles out most of the money through specific programs. There's $90 billion more for Medicaid, $12 billion for special education, $2.8 billion for various policing programs. Even $54 billion of block grants to states impose restrictions on how funds can be spent. More power is being centralized in Washington.
No one knows the economic effects of all this; estimates vary. But Obama's political strategy stunts the impact from what it might have been. Postponed spending weakens the economic benefit. By using the stimulus for unrelated political and policy goals, Obama mandates delays. Obama brags that there are no "earmarks" in the package. This is technically true if an "earmark" is considered a project specifically designated for a politician's home district. But hundreds of billions are "earmarked" for identifiable constituencies. There's another downside: "temporary" spending increases for specific programs, as opposed to block grants, will be harder to undo, worsening the long-term budget outlook.
Politics cannot be removed from the political process. But here, politics ran roughshod over pragmatic economic policy. The stimulus program was highly partisan from the start. The feeble efforts to win Republican support resulted in changes (including the AMT provision) that actually weakened the package. Obama is gambling that his flawed stimulus will work well enough, or seem to work well enough, that he'll receive credit for restarting the economy—and not engineering a colossal waste.
Robert Samuelson is the author of The Great Inflation and Its Aftermath: The Past and Future of American Affluenceand Untruth: Why the Conventional Wisdom Is (Almost Always) Wrong.