James Pethokoukis

Politics and policy from inside Washington

Why Obama’s school rehab plan may flop

Sep 14, 2011 18:05 UTC

The point of President Barack Obama’s American Jobs Act is, well, to create jobs. And the sooner the better, right? Unemployment is above 9 percent, and everyone from Wall Street to the Congressional Budget Office to the White House now thinks that number isn’t going to improve anytime soon. Thus Obama’s new $450 billion stimulus plan. But since this new proposal is structured just like 2009′s $800 billion American Recovery and Reinvestment Act, it should be no surprise that it contains many of the same flaws as Stimulus 1.0.

Example: Yesterday, Obama traveled to Fort Hayes High School in Columbus, Ohio to promote his plan, particularly the bit about spending $25 billion to refurbish 35,000 American schools. Here is some color from The Columbus Dispatch:

Obama toured Fort Hayes Arts and Academic High School, a campus of Columbus City Schools buildings, some of which date back to the Civil War era and have undergone significant upgrades. The president’s jobs plan calls for the $25 billion to modernize 35,000 schools nationwide. Ohio could get up to $985.5 million, with up to $111.6 million for Columbus City Schools. ”I wouldn’t mind taking a few classes here,” said Obama, who used Fort Hayes as an example of upgrades and jobs created to complete those upgrades that could take place throughout the U.S. If his bill is passed. ”The renovation of Fort Hayes is a great example of where those jobs can come from if we can finally get our act together in Washington,” Obama said.

But what Fort Hayes High School really exemplifies is how long it will take for this new round of government spending to show any employment results. Some $55 million in renovations on the campus began in March 2003, starting with design work, and were originally scheduled to be completed by March of 2007. Different projects started at different times, with each scheduled to take about three years to complete. Heck, it takes months just to do the necessary architectural planning. In short, there will be nothing “shovel ready” about these education infrastructure projects. If we want to upgrade U.S. schools, fine. But the effort will make for a poor 2012 jobs plan.

And, of course, there are always concerns about how efficiently this money would be spent. In 2010, Los Angeles opened its new Robert F. Kennedy High School, costing $578 million. Here’s how ABC News described it:

The new campus between Wilshire Boulevard and 8th Street in Los Angeles preserve pieces of the historic hotel, but it’s the stunning new architecture that’s drawing eyes and plenty of wagging fingers.

The soaring, unusually shaped buildings are clad in glass and metal, and the interiors are just as slick. The facility boasts a state-of-the-art swimming pool, fine art murals, an ornate auditorium suitable for hosting the Oscars, and a faculty dining room that the superintendent says is “better than most restaurants.”

All those amenities add up to an enormous price tag, which works out to about $250,000 per pupil. That $578 million cost is more expensive than the Bird’s Nest stadium built for the 2008 Olympic Games in Beijing, China, which cost $500 million. It’s also significantly more expensive than the $400 million home of the Denver Broncos, Invesco Field at Mile High.

So a) all this new spending would not create many jobs anytime soon — even if you buy its Keynesian rationale — and b) the rush to spend money may result in plenty of waste just as with the LA high school and the loan guarantees to solar-panel maker Solyndra.


To fight against unemployment/joblessness, a country, in the modern age of our time does not need spending here and there including schools etc., rather private sectors concerning to industries and agricultural farming need to be encouraged to establish more and more of them and thus adequate number of jobs would be created in those newly formed projects and the economy of the country would be enhanced.

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Maybe Obama should have pulled a Christie on infrastructure stimulus

Oct 22, 2010 19:30 UTC

Cause it really hasn’t worked out so well, as The Economist outlines.  The magazine criticisms are as follows:

First, and most important, a relatively small share of the bill was actually devoted to infrastructure. But even on the broadest definition of the term, infrastructure got $150 billion, under a fifth of the total. …Just $64 billion, or 8% of the total, went to roads, public transport, rail, bridges, aviation and wastewater systems.

Second, hopes for an immediate jolt of activity were misplaced. … By October 2009 even the fastest programs—those under the highway and transit headings—had seen work begin on just $14.3 billion-worth of projects.

Meanwhile the bill’s most notable project, high-speed passenger rail, threatens to become a debacle.  … Freight companies worry that new passenger services will simply increase congestion. Any new rail service, meanwhile, is unlikely to be particularly fast. The Recovery Act dedicated $8 billion for high-speed trains, a sizeable sum but not enough for any train that is actually high-speed.

Me:  OK, so the infrastructure plan wasn’t the greatest. Also, the tax “cut” portion of the plan was poorly structured. Is is any surprise that the US is looking at a continuation of the New Normal slow-growth, high unemployment scenario?

How U.S. stimulus is being exported

Aug 18, 2010 18:08 UTC

Interesting to see if any politicians pick up on this argument from former Morgan Stanley economist Andy Xie:

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.

Once more on Blinder-Zandi and the Obama stimulus

Aug 10, 2010 17:51 UTC

Great piece by Lawrence Lindsey in The Weekly Standard on the stimulus bill and the recent Blinder-Zandi analysis of it:

This is the economic equivalent of assuming there are 1,000 angels on the head of a pin, observing that we have 10 pins, and therefore calculating that we must have 10,000 angels. The math is fine. But it sheds no light on the key policy issue—were the recently passed acts of government stimulus cost effective? The degree of cost effectiveness was an assumed number, not one calculated using any version of the scientific method.

From a macroeconomic perspective, a targeted bill would have injected money directly into the cash flow of American households and small businesses where it was needed. Many of us who supported the administration’s call for a stimulus in early 2009 recommended the reduction of the payroll tax for both employers and employees, something with the same net revenue effect as what was passed. Such a payroll tax cut would have provided an incentive at the margin for continued work and employment for more than 90 percent of the labor force. The tax provision in the actual stimulus that passed did so for less than 15 percent of the labor force, and the spending provisions impacted only 2 percent of the labor force even under the administration’s assumptions. That is bad targeting.

ECB study casts doubt on wisdom of more stimulus

Jul 20, 2010 16:55 UTC

The EU’s central bank argues against spending more government cash (via taxpayers) to boost economies:

Finally, our results indicate that rising government debt is the main reason for declining spending multipliers at longer horizons, and thus increasingly negative long-run consequences of fiscal expansions. In the spirit of Giavazzi and Pagano (1990) and Giavazzi, Jappelli, and Pagano (2000), we interpret this finding as an indication that further accumulating debt after a spending shock leads to rising concerns on the sustainability of public finances. In this context, agents may expect larger fiscal consolidation in the future which, in turn, depresses private demand and output.

Me: The study also found that each $1 of government stimulus spending only produces 50 cents of GDP growth.


“In this context, agents may expect larger fiscal consolidation in the future which, in turn, depresses private demand and output.” – that is ‘Bankese’ for War. If nations go bankrupt and cannot provide the simple services that citizens have come to expect then people will expect more from the government – not less. The only thing left will be nationalist rhetoric, armaments and final expenditure in battle and death. The part about ‘larger fiscal consolidation’ is, of course, conquering other nations and absorbing their governments while ‘depresses private demand and output’ clearly refers to the destruction of the means of production on a large scale which depresses output and, of course, the deaths of many people – which would logically depress demand for as long as they are dead.

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The U.S. state budget shortfall in a picture

Jun 14, 2010 20:08 UTC

This, from the Center on Budget and Policy Priorities:


5 reasons why “Son of Stimulus” is a bad seed

May 26, 2010 18:34 UTC

The American Jobs and Closing Tax Loopholes Act? Really? Even by the disingenuous standards of Capitol Hill, calling the $174 billion spending package making its way through the House “a jobs bill” takes some real moxie.

Die-hard Keynesians, of course, will contend that so long as money gets pushed into the economy, how it gets spent isn’t so critical. But for a government running trillion-dollar budget deficits, at least every billion or so should count. And it’s hard to argue that this bill is optimized for job creation or economic growth.

1) For instance, the bill includes a one-year, $6.7 billion extension of the federal research and development tax credit. By not making it permanent, the credit is less likely to foster long-term investment. The bill also extends tax breaks for NASCAR and Hollywood, ensuring both Red and Blue state residents get fed their respective helpings of pork.

2) More than a quarter of the spending — $47 billion over 10 years — goes toward extending unemployment insurance benefits. Economists worry the increased availability of such assistance may reduce the intensity with which the jobless look for work and lengthen the duration of unemployment by nearly 10 percent. It’s also tough to pin down the job-creating impact of spending $63 billion to increase Medicare payments to doctors and $24 billion for higher Medicaid spending.

3) Even worse, the proposal enlarges the budget deficit. Less than a quarter of the tab is paid for, showing again just how easy it is for Congress to avoid self-imposed limits on deficit spending. And increased Medicare spending was excluded from healthcare reform so the bill could get a better score from the Congressional Budget Office.

4) The White House will argue that given the high unemployment rate, bringing down the deficit is less of a priority. But listen to what economist Carment Reinhart told the president’s deficit panel today (via The Hill):

The gross U.S. debt is approaching a level equivalent to 90 percent of the country’s gross domestic product, the level at which growth has historically declined, said Carmen Reinhart, a University of Maryland economist. When gross debt hits 90 percent of GDP, Reinhart told the commission during a hearing in the Capitol, growth “deteriorates markedly.” Median growth rates fall by 1 percent, and average growth rates fall “considerably more,” she said.

Reinhart said the commission shouldn’t wait to put in place a plan to rein in deficits. “I have no positive news to give,” she said. “Fiscal austerity is something nobody wants, but it is a fact.

5) Barack Obama’s original stimulus plan was $787 billion (though costs have pushed it up to $862 billion). While some advisers argued for $1.2 trillion, the president sided with those who believed an amount of such Brobdingnagian size would alarm financial markets — and probably voters, too. This latest legislation, combined with a $17 billion jobs bill passed in March, would put the tally at around $1 trillion, not counting interest. In due course, the math will be easy enough for the markets to understand.


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One more reason why 2011 looks bad

Dec 28, 2009 15:34 UTC

Interesting analysis from Deutsche Bank, especially the last part which I put in bold (via Econbrowser):

Based in part on CBO estimates, we expect the combined positive effects on the level of real GDP of the tax cuts, transfers, and spending increases in the ARRA package to peak around the middle of next year and then to begin to diminish. Translating these level effects into impacts on the annual rate of growth of GDP yields a boost of 1 to 2 percentage points to GDP growth through mid-2010. That growth effect then drops to zero and eventually turns negative during the second half of the year, subtracting about a percentage point from growth during 2011. This is a key reason why we see growth receding somewhat in 2011 relative to 2010. We have not assumed that a major portion of the Bush tax cuts will be allowed to expire at the end of 2010, but that does pose a downside risk to the forecast.

Me: And here is all that in chart form:



One additional comment: the expiration of the Bush tax cuts in 2011 should actually prove to be a stimulus for the economy in 2010, because it gives individuals and business an incentive to accelerate income, and to realize capital gains and reinvest the proceeds in projects with better returns on investment.

Big Government and the Big Split

Dec 28, 2009 14:57 UTC

The WSJ nicely sums up 2008:

To prevent crumbling housing and credit markets from sinking the broad economy, the Bush and Obama administrations and the Federal Reserve spent, lent and invested more than $2 trillion on one initiative after another. If you owned a credit card or a money-market fund, had a savings account, bought a Dodge pickup or even a hunting rifle, or borrowed to buy a home or finance a small business, odds are good that the U.S. stood behind you or the firm that served you.

Washington pumped $245 billion into nearly 700 banks and insurance companies and guaranteed almost $350 billion of bank debt. It made short-term loans of more than $300 billion to blue-chip companies. It propped up life insurers and money-market funds.

It bailed out two of the three U.S. auto makers. It lent billions trying to jump-start commercial-real-estate, small-business and credit-card lending. In two February stimulus bills enacted a year apart, the government committed $955 billion to rouse the economy. Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis. Just last week, the Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.

But voters don’t seem to be buying the idea that the government saved the economy. This from pollster Rasmussen (note the last sentence):

The number who believe that the stimulus plan has hurt the economy rose from 28% in September, to 31% in October, and 34% in November before jumping to 38% this month. The week after the president signed the bill, 34% said it would help the economy, while 32% said it would hurt.

The Political Class has a much different view than the rest of the county. Ninety percent (90%) of the Political Class believes the stimulus plan helped the economy and not a single Political Class respondent says it has hurt. (See more on the Political Class). The underlying reason for skepticism about the stimulus plan is that 50% of voters believe increasing government spending is bad for the economy. Just 28% believe that increased government spending helps the economy.

Me: Americans rightly think the economy is in terrible shape. The argument that the economy would be worse if not for government is a hard one to make for Team Obama … especially since government played a critical role in creating the housing and financial crises. Making all this worse is a 2010 economy that may be a muddle at best — so-so growth, unemployment still above 9 percent, rising interest rates and moribund housing.

Drilling into Obama’s jobs plan

Dec 9, 2009 17:50 UTC

Keith Hennessey:

This looks like a smaller version of the original stimulus law.  Its origins are more political and fulfilling a legislative need, than policy-driven. I’m OK with the UI extension and extending the health insurance subsidy, although I wish both were better designed. I generally support tax relief, but I am concerned the targeted capital gains reduction will give some cover to let the broader capital tax rates jump at the end of 2010.  That would be very bad. The spending programs will have little near-term GDP effect, and so should be evaluated in how they meet other policy goals.  They’re largely ineffective as immediate stimulus, because government spending is slow. The $250 check to seniors was pandering the first time Congress passed it (on a broadly bipartisan vote).  It’s still pandering.  Why are seniors more deserving of aid than, say, a low-income working family? The “using TARP dollars to help Main Street” is a transparent gimmick.  If you’re going to increase the deficit, it’s better just to stand up and say the deficit increase is worth the short-term economic benefit you think will result from the other policies. I suggest they do a targeted bill that contains only the UI and COBRA provisions, because I think the large deficit impact of the other provisions, relative to their small macroeconomic benefit, isn’t worth it.