James Pethokoukis

Politics and policy from inside Washington

More evidence ‘stimulus’ doesn’t work too well

Jun 26, 2009 14:25 UTC

From Action Economics (bold is mine):

Today’s U.S. reports revealed a bigger May income boost than we assumed from recent stimulus legislation, but a lower service consumption trajectory nevertheless, to leave a remarkable surge in the savings rate and a slightly weaker trajectory for aggregate demand as we approach mid-year.  We also saw a small upward bump in the Michigan sentiment index in June as the various confidence measures post gains from Q4-Q1 lows, though confidence remains remarkably lean. The soaring savings rate shows that households are still bracing for the worst despite improving market conditions, as they hoard distributed stimulus benefits and hence truncate some of the “stimulative” effects.


I’m squirrelling away my extra $13/week to pay for my share of the carbon tax pass throughs. That way I only need to come up with an additional 842.23 through the year for those offsets.

Can a VAT be right around the corner? Thank you Sir, may I have another?

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Obama’s stimulus trap

Jun 25, 2009 18:28 UTC

It was, potentially, the most explosive question asked at President Barack Obama’s news conference. Just nine words: “Do you think you need a second stimulus package?”

Now Obama seems to pride himself on his logical nature, so the logical building blocks of the question were surely appreciated.

Consider: The president’s nearly $800 billion stimulus plan was predicated on a particular economic forecast. According to that forecast, the stimulus package would prevent the U.S. unemployment rate from exceeding eight percent. (Even without the stimulus, Team Obama thought nine percent was the upper joblessness limit.)

The unemployment rate is already 9.4 percent, and Obama himself said that number will exceed 10 percent before long. Ipso facto, the stimulus package — Obama’s signature achievement as president so far — was either too small, improperly structured, or both. To admit the need for a “second stimulus” is to admit the first one failed.

So Obama didn’t. After replying “Well, not yet” to the original question, Obama admitted only that the White House forecast has been way too optimistic:

“I think it’s fair to say that, keep in mind the stimulus package was the first thing we did, and we did it a couple of weeks after inauguration … If you recall, it was only significantly later that we suddenly get a report that the economy had tanked. And so it’s not surprising, then, that we missed the mark in terms of our estimates of where unemployment would go.”

So “not yet” is certainly a correct, if limited answer. No need for a second stimulus package, since the first one hasn’t really even gotten going yet.

Some two-thirds of the $787 billion American Recovery and Reinvestment Act was planned to be spent after 2009, so immediate “stimulus” was never really the primary intent of the package. If it had been, the plan would have been front-loaded (massive payroll tax cuts being one possible mechanism) to boost the economy at the nadir of the recession.

As it is, the economy will likely be growing (hopefully) when the bulk of the money hits, though unemployment may still be rising or stuck at a high level.

No, the main goal of the ARRA was to make a downpayment on the Obama healthcare, energy and education agenda, leaving it mostly to monetary policy to bolster the economy in 2009.

Not surprisingly, Obama didn’t highlight the uncomfortable reality that this economic bug was really an intended feature. And most Americans surely don’t realize the political and economic subtleties at play, and so to them the “stimulus” plan doesn’t seem to be very stimulative. Of course, it was not intended to be.

Indeed, a Rasmussen poll earlier this month found that by a 45-to-36 percent margin, Americans think the rest of the stimulus plan should be canceled.

(And, of course, quickie stimulus programs programs have a poor track record. Back in 2008, only a third of the $100 billion Bush stimulus was spent by consumers, according to the Economic Policy Institute. Economist Martin Feldstein estimates that only 15 percent was spent.)

Is it any wonder, then, that if a growing number of Americans think the president’s major economic achievement should be dumped, that a growing number also disapprove of his handling of the economy?


Kind of a dumb question. If Americans think that his “major economic achievement should be dumped”, then of course they disapprove of his handling of the economy. “If you recall, it was only significantly later that we suddenly get a report that the economy had tanked”. I don’t know who gives him his information but I knew the economy was in the tank when they started campaigning and it definitely went down significantly well before he got elected. I do not believe Obama’s intentions are pure for the good of the American people nor the Constitution he’s sworn to defend to the best of his abilities.

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Obama and a second stimulus package

Jun 23, 2009 18:15 UTC

Actually, it would the third stimulus, counting the one from Bush. The president at his new conference this afternoon:

QUESTION: Do you think you need a second stimulus package?

MR. OBAMA: Well, not yet, because I think it’s important to see how the economy evolves and how effective the first stimulus is. I think it’s fair to say that, keep in mind the stimulus package was the first thing we did, and we did it a couple of weeks after inauguration.

At that point, nobody understood what the depths of this recession were going to look like. If you recall, it was only significantly later that we suddenly get a report that the economy had tanked. And so it’s not surprising, then, that we missed the mark in terms of our estimates of where unemployment would go.

I think it’s pretty clear now that unemployment will end up going over 10 percent, if you just look at the pattern, because of the fact that even after employers and businesses start investing again and start hiring again, typically it takes a while for that employment number to catch up with economic recovery. And we’re still not at actual recovery yet.

So I anticipate that this is going to be a — a difficult — difficult year, a difficult period.

QUESTION: What’s the high-water mark, then, for unemployment?

MR. OBAMA: I — I am not suggesting that I have a crystal ball, since I — since you just threw back at us our last prognosis, let’s not — let’s not engage in another one.


MR. OBAMA: But — but — but what I am saying is that here are some things I know for certain: In the absence of the stimulus, I think our recession would be much worse. It would have declined. Without the Recovery Act, we know for a fact that states, for example, would have laid off a lot more teachers, a lot more police officers. and a lot more firefighters.

Every single one of those individuals whose jobs were saved as a consequence, they are still making their mortgage payments. They are still shopping.

So we know that the Recovery Act has had an impact.

Now, what we also know is this was the worst recession since the Great Depression. And — and people are going through a very tough time right now. And I don’t expect them to be satisfied.

I mean, one thing that — you know, as I sometimes glance at the various news outlets represented here, I know that, you know, there is sometimes reporting of, “Oh, the administration’s worried out this,” or “their poll numbers are going down there,” or this is.

Look, the American people have a right to feel like this is a tough time right now. What’s incredible to me is how resilient the American people have been and how they are still more optimistic than — than the facts alone would justify. Because this is a tough, tough period.

And I don’t feel satisfied with the progress that we’ve made. We’ve got to get our Recovery Act money out faster. We’ve got to make sure that the programs that we put in place are working the way they’re supposed to.

I think, for example, our mortgage program has actually helped to modify mortgages for a lot of people, but it hasn’t been keeping pace with all the foreclosures that are taking place.

I get letters every day from people who say, “You know, I appreciate that you put out this mortgage program, but the bank is still not letting me modify my mortgage, and I’m about to lose my home.”

And then I’ve got to call my staff and team and find out, you know, why isn’t it working for these folks and can we adjust it, can we tweak it, can we make it more aggressive?

This is — this is a very, very difficult process. And what I’ve got to do is to make sure that we’re focused both on the short term — how can we provide families immediate relief and jump-start the economy as quickly as possible — and I’ve got to keep my eye on the long term.

And the long term is making sure that by reforming our health care system, by passing serious energy legislation that makes us a clean-energy economy, by revamping our education system, by finally getting the financial regulatory reforms in place that are necessary for the 21st century, by doing all those things we’ve got a foundation for long-term economic growth and we don’t end up having to juice up the economy artificially through the kinds of bubble strategies that helped to get us in the situation that we’re in today.


1930s New Deal policies did not work then and won’t work now. High fixed wages and price controls in conjunction with rationing during World War II allowed for vast savings to be accrued in the U.S.. After the war people could by cars with cash and in some cases homes.

I am not advocating another war. However a massive works project producing solar panels, electric generators, natural gas conversion kits for automobiles would be a start. Getting people off the grid would translate into reduced power grid improvement. At the same time a public works project developing Geo thermal power generation is paramount. Once an excess energy infrastructure and personal savings by the middle class has been built, economic restrictions can be lifted.

There is every reason to believe a free market economy can prosper again. The essential component will be to limit the use and need for credit.

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Obama stimulus vs. Reagan tax cuts

Jun 15, 2009 13:59 UTC

Paul Krugman worries that phony inflation fears will lure policymakers into withdrawing fiscal and monetary stimulus too soon. In the process, he takes a shot at Reaganomics:

And Republicans, providing a bit of comic relief, are saying that the stimulus has failed, because the enabling legislation was passed four months ago — wow, four whole months! — yet unemployment is still rising. This suggests an interesting comparison with the economic record of Ronald Reagan, whose 1981 tax cut was followed by no less than 16 months of rising unemployment.

Me: But as pointed out in the wonderful book “The End of Prosperity” (authored by my pals Art Laffer and Stephen Moore),  the way the Reagan tax cuts were structured meant that familes only got a meager 1.25 percent tax cut in 1981 and 10 percent in 1982. When the Reagan cuts really kicked in 1983, so did the economy.

Obama stimulus vs. Fed stimulus update …

Jun 15, 2009 13:48 UTC

A stimulus update from my guy Dan Clifton, super-analyst at Strategas Research: “Through June 5th, about $46bn of stimulus spending and $10bn of tax cuts have been enacted (total $56bn) via President Obama’s $787bn stimulus package (7.1%).”

Now let’s compare that to what the Fed’s been doing (via the WSJ):

Since the onset of the financial crisis nine months ago, the government has become the nation’s biggest mortgage lender, guaranteed nearly $3 trillion in money-market mutual-fund assets, commandeered and restructured two car companies, taken equity stakes in nearly 600 banks, lent more than $300 billion to blue-chip companies, supported the life-insurance industry and become a credit source for buyers of cars, tractors and even weapons for hunting.

Has Obamanomics already failed?

Jun 9, 2009 13:43 UTC

That is is the insta-conclusion of Newt Gingrich. What you can say, I think, is that the administration appears to have been overly optimistic. Indeed, Obama advisers are already admitting that. The economic forecasts driving the stimulus package were too rosy, as was the “stress test” worst case scenario. And had Team Obama been gloomier — as gloomy as the Inauguration Day speech, say — would their policies have been different, would they have followed the advice of folks like Paul Krugman and Robert Kuttner and pushed for a much bigger stimulus package? Or would they have at least front loaded the existing stimulus package by increasing the emphasis on tax cuts vs. “investment” spending? Perhaps. But the gamble they took was to let the Fed pretty much handle the near term (and avoid a depression) while they would focus on bolstering the economy for the longer term and pushing through their policy agenda.


“A recession is when your neighbor loses his job; a depression is when you lose yours. And recovery is when Obama loses his.” – Ronald Reagan
Only in the original 1980 quote it was “when Jimmy Carter loses his”

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What’s in a name?

Jun 5, 2009 12:10 UTC

The American Recovery and Reinvestment  Act is quite poorly named. First of all, the U.S. economy is already recovering even though maybe 5 percent of the $800 billion package has been spent. Plus, much of the spending will have nothing to do with reinvestment, as the Associated Press notes:

Most of the roughly $300 billion going directly to the states is being funneled through existing government programs for health care, education, unemployment benefits, food stamps and other social services. “We all talked about ‘shovel-ready’ since September and assumed it was a whole lot of paving and building when, in fact, that’s not the case,” said Chris Whatley, the Washington director of the Council of State Governments, a trade group for state governments. He estimates states will get three times more money for education than for transportation.

Do we need a second Obama stimulus pacakge?

May 29, 2009 14:56 UTC

Back in January when Team Obama was pushing its stimulus plan, the White House put out a self-analysis of the potential economic impact of the plan, authored by Jared Bernstein and Christina Romer.  If Congress passed the president’s plan, the report said, the U.S. unemployment rate would rise to just under 8 percent by later this year and fall to 7 percent by Q4 2010. If the plan was not passed, the reported predicted, the U.S. unemployment rate would climb to 9 percent next year.

Time for a reality check. Unemployment is already at 8.9 percent The consenus private sector estimate is that unemployment will average 9.7 percent next year. Douglas Elmendorf, head of the Congressional Budget Office, says unemployment will peak at 10.5 percent next year.  One conclusion is that we need another mega-stimulus package. An alternatve conclusion would be that the first one isn’t working and it’s time for Plan B.


I would agree that the original stimulus plan isn’t working. The plan was poorly planned and I believe that the Obama Administration rushed this plan due to all the hype generated from Obama’s campaign promises. If the country is going to move forward with another stimulus package, I think the money would be put to better use if it was invested into civil construction projects. Civil Construction projects would not only help boost the economy, but it will also help to decrease the growing unemployment, which at this point in time, getting people back to work is one of the most important issues this country faces.

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