…because I’m an economist and a mom–that’s why!

Recovery Package Is Assisting More Than Activating So Far

June 27th, 2009 . by economistmom

Back a few months ago when the American Recovery and Reinvestment Act of 2009 was signed into law, I tried to explain that the package was trying to do a lot of things–not just “stimulate” the short-term economy–and that in evaluating how well the package would “work,” we’d have to consider how it’s done on all those different fronts.

Yesterday Bruce Bartlett summarized some of the empirical evidence that’s come in thus far, pointing out that the “stimulus” hasn’t been very stimulating, but that we shouldn’t be surprised.  To start, most of the package was intended to assist, not create new economic activity (new pieces of GDP):

Congressional Budget Office Director Douglas Elmendorf recently presented a report…in which he walked through some of the problems with implementing the stimulus program.

First of all, 60% of the stimulus package was never going to have much of a stimulative effect. These were programs like extending unemployment benefits and tax credits with no incentive effects that may have been justified on the merits, but don’t really do anything to increase growth or reduce unemployment.

And on top of that, the minority of the package that was supposed to be the true “stimulus” part has been the slowest to spend out:

…[O]nly 40% of the package went to programs like public works that have a high multiplier. Moreover, the programs with a low multiplier were the fastest ones to implement; those with a high multiplier take much more time to come online. According to Elmendorf, by the end of fiscal year 2009, which ends on Sept. 30, about a third of the least stimulative spending will have been spent vs. only 11% of the highly stimulative spending.

(How frustrating…)  So what’s the big deal about throwing extra money at the problem?  What’s wrong with much of the stimulus having an effect say a year from now by which time most economists now believe the recession will be over?  (What’s wrong with throwing more water at a fire than what’s needed to put out the fire?)  For one thing, we might not be able to afford the “wasted” deficit-financed spending (we may run out of water when we need it for later fires).  For another thing, Bruce worries it may be hard to change our mind about that expansive fiscal policy even when there’s no more downward cycle to counter:

Many years ago John Maynard Keynes warned against using public works for stimulus for precisely this reason–they are too hard to reverse once the need for them has passed. With many economists already warning about inflation coming back in the near future, the ultimate legacy of the stimulus bill may be to make it harder to tighten fiscal policy when it will be needed.

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