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The Stimulus Report Card

Author: Roya Wolverson
Updated: March 9, 2010
This publication is now archived.

Introduction

One year after its creation, the effectiveness of U.S. President Barack Obama's $787 billion stimulus package remains a matter of heavy debate. The Obama administration says the package has saved millions of jobs and boosted domestic growth. Critics contend the stimulus has been poorly focused(RFE/RL), with some Republican lawmakers charging the Recovery and Reinvestment Act's $288 billion in tax cuts have been insufficient in boosting consumer and business spending, while government spending has been too much. China's proportionally larger stimulus plan and faster rebound suggest to some the inadequacy of U.S. stimulus outlays. European governments, which budgeted comparatively lesser amounts to stimulus than the United States and China, have had mixed results. Some U.S. economists and Democratic lawmakers urge spending more to stave off a possible "double-dip" recession. Other economists worry about the country's massive debt load, which undermines long-term confidence in the economy.

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What is the purpose of stimulus plans?

Economic or "fiscal" stimulus, as outlined in this CFR Backgrounder, is a tool for governments to boost economic growth when monetary stimulus--which mainly involves encouraging or discouraging lending by varying interest rates--proves insufficient. In the short term, economic stimulus often involves boosting consumer spending, business investment, and job creation through tax cuts and public works projects. Longer-term, government-led investment in infrastructure and technology aims to boost individual consumption and economic competitiveness by reducing costs for basic needs like healthcare and energy. Critics of economic stimulus argue that governments fail to allocate resources, and stimulus payments lose their intended effect. "What the government does may not be bad. But it is rarely optimal. Neither a TSA worker nor a stimulus worker is as likely as a private-sector entrepreneur to come up with and implement an idea yielding big productivity gains" writes CFR's Amity Shlaes in a January 2010 Bloomberg op-ed.

What were the goals of the Obama administration's stimulus plan?

The Obama administration outlined (PDF) three goals of the Recovery Act: to help provide 1) short-term relief to Americans hardest hit by the recession; 2) state-level government assistance to jumpstart the economy; and 3) long-term growth by investing in existing infrastructure and energy, education, and healthcare. Republican lawmakers have cited persistent high unemployment and slow growth as evidence that the Recovery Act failed to meet its goals. A September 2009 report by the Center for Budget and Policy Priorities says the Recovery Act was not intended to revive the economy immediately but to "slow the economy's downward spiral and then help it recover over time." Critics of the stimulus, the report argues, fail to note that public and private sector forecasts underestimated the severity of the downturn before the Recovery Act took effect. CFR's Benn Steil says there are too many unknowns to judge. "Since we cannot know what would have happened to growth and jobs in the absence of the stimulus package, no one can say definitively what the effect has been," he says.

How much of the money has been spent?

In January 2010, the White House estimated that $263.3 billion of the original $787 billion, or roughly one-third of the total stimulus, had been distributed in the form of tax cuts and entitlements. How much of that has actually been spent by states, contractors, and individuals is unclear (U.S. News and World Reports). A November 2009 November 2009 report (PDF) by the inspector general for the Internal Revenue Service warned that the IRS did not know whether the Recovery Act's tax expenditures--such as the First-Time Homebuyer Credit--were being claimed legitimately, because no additional documentation for new credits and deductions were required by Congress.

"Since we cannot know what would have happened to growth and jobs in the absence of the stimulus package, no one can say definitively what the effect has been." - CFR's Benn Steil

What qualifies as stimulus spending is also a matter of debate. In a January 2009 interview (PDF), Adam Posen of the Peterson Institute for International Economics argued that total spending on stimulus initiatives could include programs beyond the Recovery Act, such as the Treasury's $700 billion TARP funds, extensions of unemployment insurance, healthcare expansion, and Federal Reserve purchases of mortgage-backed securities. The Obama administration's $3 billion "cash-for-clunkers" program, the summer 2009 program that incentivized U.S. residents to trade in older cars for new, more fuel-efficient vehicles, is another example.

Regardless of the actual funds dispersed, some analysts argue most of the stimulus has already been spent in terms of impact. In a September 2009 Atlantic article, law and economics expert Richard Posner said that although the actual stimulus spending has been small, "the significance of the stimulus program is more psychological than (as yet) economic." Christina Romer, chair of President Obama's Council of Economic Advisors, said in October 2009 congressional testimony before the Joint Economic Committee that while the stimulus will continue to trickle into the economy for several years, "By mid-2010, fiscal stimulus will likely be contributing little to further growth."

How many jobs have been created by the stimulus?

The Recovery Act was designed to create or save 3.5 million jobs over two years. In January, the White House estimated (PDF) that between 1.5 million and 2 million jobs could be attributed to the stimulus package. A November 2009 CBO report estimated (PDF) the stimulus created 600,000 to 1.6 million jobs through the end of the 2009 third quarter. Republican lawmakers and some economists criticized (WSJ) the Obama administrations' estimates, which attempted to include jobs that existed indirectly as a result of stimulus projects and employed what they consider questionable methodology.

In testimony before Congress' Joint Economic Committee, George Mason University economist Russell Roberts said the CBO's estimates were imprecise, because they relied on previous policies' impacts and past economic models rather than current information. Roberts also argued the stimulus would have created more jobs if directed toward different industries. While roughly half of the job losses since December of 2007 have been in construction and manufacturing, over 80 percent of direct federal spending has gone to the Departments of Health and Human Services, Department of Labor, Department of Education, and the Social Security Administration, he said, which are agencies that "don't have many shovels."

Brookings Institute fellow Gary Burtless says while the stimulus package should have devoted more funding to "shovel-ready" jobs, Congress and the administration, like most economic forecasters, underestimated the gravity and duration of the recession. "We often seen in post-war recessions that by the time the manpower in these projects is hired, the economy is already well into recovery, and we're worrying about too many government contracts competing with the private sectors."

How have stimulus funds fared at the state level?

In February 2009, the Obama administration estimated how many jobs the stimulus package would create in each state. The biggest expected winners (PDF) were California, Texas, New York, and Florida, whereas less impact was expected in less populous states such as Alaska, North Dakota, Vermont, and Wyoming.

[M]ore than half of U.S. states did not have adequate capacity to carry out stimulus-related education initiatives, and while stimulus funds are helping to bolster state budgets, their impact on improving education remained unclear. – The Center on Education Policy

In a May 2009 Center for Economic and Policy Research paper (PDF), Dean Baker and Rivka Deutsch argue that the stimulus' national impact has been muted by state and local-level budget shortfalls. Unlike the federal government, which has the capacity to run multi-year deficits, nearly every state government is legally required to balance its budget each year. According to the Center for Budget and Policy Priorities, the shortfall for state governments from 2009 through 2011 is projected to be more than $100 billion a year. The Carnegie Endowment's Albert Keidel argues the U.S. stimulus diverted too many funds to tax breaks, rather than funding more projects at the state level to keep teachers and social workers employed. A December 2009 report by the Center on Education Policy found more than half of U.S. states did not have adequate capacity to carry out stimulus-related education initiatives and that, while stimulus funds are helping to bolster state budgets, their impact on improving education remained unclear.

How has the stimulus affected U.S. business competitiveness?

Many economists argue that investing in infrastructure promotes long-term economic growth by lowering business costs and increasing productivity. A January 2009 paper (PDF) by the University of Massachusetts' Political Economy Research Institute said gross domestic product and public infrastructure investment have risen and fallen together since the 1950s, while infrastructure investment growth has on average lagged economic growth since 1980. Heritage Foundation fellow Ronald Utt says the relationship between infrastructure spending and economic activity is modest and its impact often delayed.

While the Recovery Act devoted more than $150 billion to public works projects, critics find shortsightedness to some initiatives. Director of the Brookings Institute's Metropolitan Policy Program Bruce Katz has said the Recovery Act helped boost U.S. competitiveness by delivering short-term employment but that it focused too heavily on temporary construction jobs rather than sustainable employment. It also ran too much funding "through legacy systems, primarily state departments of transportation, which tend to allocate funds with a greater focus on political rather than market and environmental returns," he said.

"[U.S. GDP is] much more dependent on household consumer spending than China, which makes China's stimulus job much easier, since the investment demand there is for public goods and services like infrastructure." – Albert Keidel, Atlantic Council

Some lawmakers and economists argue the stimulus tax cuts were too heavily skewed toward low-income individuals, which they say impacts growth less than tax cuts to wealthy individuals and corporations with greater capacity to spend and invest. In a December 2009 Forbes op-ed, former Treasury department economist Bruce Bartlett argues just the opposite: Tax cuts allocated to wealthy individuals and corporations by the stimulus were less impactful than those for lower-income individuals. He cites data from the CBO, which found that tax cuts for low-income individuals raised GDP by as much as $1.70 for every $1 of stimulus money spent, while those for the rich and for corporations raised GDP by, at most, 50 cents for every $1 spent. CFR's Shlaes says the biggest flaw of the stimulus' tax cuts was their duration. An effective tax cut is "permanent, as opposed to timed to the business cycle, one that doesn't worry about where it hits in the income scale," she says.

How does the U.S. stimulus package compare to those in Europe and China?

In November 2008, G20 leaders pledged to use fiscal stimulus to boost domestic demand and prevent further decline in global GDP. A March 2009 Brookings Institution paper compared the relative size and makeup of the stimulus measures carried through as follows: Total U.S. stimulus (2008 and 2009 packages) accounted for roughly 6 percent of the country's 2008 GDP; Germany spent roughly 3.4 percent of its GDP on stimulus; Britain spent 1.5 percent; and France spent 0.7 percent. China, which suffered from a sudden collapse in exports during the downturn, allocated 4.8 percent of its 2008 GDP to stimulus spending. The share of stimulus devoted to tax cuts versus spending measures also varied across countries. Britain, for example, focused almost all its stimulus on tax cuts; China focused almost entirely on spending measures; The United States fell in between.

In its second quarterly report to Congress, the Obama administration said the U.S. stimulus added between 1.5 and 3 percentage points to U.S. GDP in the last three months of 2009. Overall, U.S. GDP grew 5.7 percent during 2009's fourth quarter compared with the previous quarter. Many economists expect that level of growth, even if stimulus-driven, will likely fade by mid-year. China's GDP growth reached 10.7% in the fourth quarter of 2009, which Keidel of the Atlantic Council partly attributes to the fact that China devoted its stimulus to boosting the real economy (the part of the economy concerned with producing goods and services, rather than buying and selling in financial markets), whereas the United States spent significant resources on recovering the financial sector. U.S. GDP is also "much more dependent on household consumer spending than China, which makes China's stimulus job much easier, since the investment demand there is for public goods and services like infrastructure," he says.

What are the implications of the stimulus for sovereign debt?

Many economists worry about the impact of more government spending on U.S. debt levels. The U.S. deficit is expected to reach 10.6 percent of GDP in 2010, a level not seen since World War II. The Obama administration predicts the deficit will be 8.6 percent of GDP in 2011 and fall to 5.1 percent the following year. But by 2014, the IMF estimates total U.S. debt will reach an unprecedented 110 percent of GDP, in part because of rising healthcare costs and slower growth resulting from the financial crisis. In December 2009, credit rating agency Moody's warned that the United States would lose its AAA credit rating (WSJ) if the government failed to reduce its deficit. But the Carnegie Endowment's Uri Dadush and Bennett Stancil argue stimulus spending is far less responsible for fiscal deficits than falling tax revenues and social service spending.

Is more stimulus needed?

In February, President Obama proposed a $100 billion jobs bill that would include tax cuts for small businesses, social-safety-net programs, and aid to state and local governments. Republicans criticized the proposal for being a new and unnecessary round (NPR) of stimulus spending that would stifle private sector growth. But IMF Managing Director Dominique Strauss Kahn in January 2010 urged advanced economies not to relax stimulus measures too early and to focus stimulus on creating jobs. At a January 2010 briefing at the Council on Foreign Relations, Chief Economist of the World Bank Justin Yifu Lin explained the U.S. and global dilemma as follows: "If you exit from fiscal stimulus, you are going to have a dip. If you maintain the stability of a fiscal stimulus, the intensity may not be enough."

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