We are now almost two years into the stimulus program that passed shortly after President Obama was inaugurated. As we approach the mid-term elections, we are faced with a constant chorus about how the stimulus didn't work. Of course, those claims seem valid enough looking at the current level of unemployment and certainly considering certain expectations at the time the package was passed. However looking at the stimulus and whether it worked or not depends on certain assumptions. For example, one stated goal of the stimulus was to save 900,000 to 2.3 million jobs. I believe the data shows that it did achieve that result. However, it was believed at the time that saving that many jobs would reduce the unemployment rate. Unfortunately, between the time the package was proposed and the start of spending, a tremendous number of additional job losses took place. So instead of stabilizing the unemployment rate in the 7-8% range, the stimulus ended up stabilizing it in the 9-10% range. Success in the goal was not enough to achieve the hoped for result.
Certainly, in the early days of 2009, there was a real threat of a depression similar to that of the 1930s, and consumers stopped spending and industry shed jobs at an unprecedented pace. The Government was face with a moving target, and the conditions in January were bad, but by March they seemed almost like the good old days. There were other problems impacting the stimulus that turned it into more than a stimulus package. If you consider many of the provisions, such as some of the subsidies provided to states to help them overcome reduced tax revenue, they had more of a social agenda than a jobs agenda. If you simply took the 787 billion ten year program, and used 78.7 billion a year to fund payrolls, assuming a cost of $50,000 per employee, you would have created over 1.5 million jobs for ten years. If programs were targeted to things like providing entry level jobs for recent graduates you could probably have created even more jobs.
Of course that is not what happened and many of the other provisions of the program did help mitigate the impact of the downturn, but ultimately, it did not target job creation enough. It is probably a safe statement to say that at the time of the Stimulus the full extent of the economic crisis wasn't understood.
The other factor that wasn't fully considered was the loss of wealth that led many Americans to start saving any money they could. Providing money to people who lost significant wealth in housing or their investment portfolio, and who therefore are forced to realize that goals such as retirement are much more remote, or debt they felt comfortable with is now onerous, will lead to pay down of that debt or increased savings. We wanted them to spend the money and they turned frugal on us. Without spending, production is not going to be robust. In fact, Corporations who restored profitability via cost cutting (i.e. layoffs) didn't see any reason to spend their profits since the future continued to be uncertain.
Was this a failure of the Stimulus package or a failure to understand the new reality that, in hindsight, is now obvious? I think it is the latter. Consumer confidence has been jolted and the easy credit of the past, is largely gone. No stimulus package can undo the history of 2008-2009 and it will take years to overcome the change in behavior.
No comments:
Post a Comment