Gauging the Success of the Stimulus

I have a different take on stimulus spending than many. I don't really think it does all that much good to the economy in and of itself -- I think instead that its primary benefit is psychological. Remember, stimulus spending is typically a one shot deal...it is by its very nature not sustainable and even the largest of stimulus packages is going to be small compared to the size of the overall economy. Thus, I think the best stimulus package is the one that is as small as possible yet is still capable of instilling new confidence in the nation's entrepreneurs, investors, and consumers. From this perspective, I felt uneasy about the stimulus package that Congress actually passed and President Obama signed in 2009. I thought it was simply too big and another nail in the coffin for America's finances. After reading the American Recovery and Reinvestment Act for myself, my concerns multiplied as much of the spending seemed geared not towards short-term economic growth but rather damage control for public institutions to help them survive the downturn.

As 2010 begins, I think we can see the stimulus bill was rather a mixed bag. It worked fantastically in terms of calming the jitters of investors. The stock market had a fine 2009 and recouped much of its losses suffered during the previous year. That in turn means that publicly listed companies have renewed access to the money raising engine that is the stock market, that large and small stock investors alike are making money, and that retirement accounts are looking much healthier . On the other hand, unemployment remains very high. The country returned to economic growth in the last quarter, but it's rather anemic growth and nothing to get too excited about. Undoubtedly, the ARRA did save many public jobs as state and local governments struggled with budget shortfalls, but the Boston Globe did some fantastic research to expose how flawed some of the jobs numbers reported really were. In many cases, jobs seem not to have really been created but rather retained instead -- in some cases, the money seems to have been downright misused, having been used to give raises to existing employees which hardly seems necessary in this economic climate. The infrastructure spending component of the stimulus has been a downright disappointment; the slow speed in getting these projects off the ground has really limited the effect it has had on unemployment. In fact, that slowness has made me question the value of infrastructure spending as stimulus at all...I'm as big a fan of good roads and strong bridges as anyone, but stimulus spending is supposed to have a speedy impact on the economy.

The fundamental problem with stimulus spending as damage control may be really exposed this year. It's quite possible that state and local governments, still facing revenue shortfalls, will be forced to cut even more jobs after they go through stimulus funds. It would've been far better to have stronger economic growth and lower unemployment at this point even at the expense of many public jobs as governments could easily start hiring again once tax revenues recovered. Instead, it looks like the stimulus may have little lingering effect on the economy and calls for a second stimulus will surely continue to be heard. (I expect any "jobs bill" that gets passed will in effect be a second stimulus even if it isn't called that.)

Ultimately, I feel that the biggest failure of the stimulus is that it didn't quite improve confidence enough. It worked for the stock market, but it didn't encourage people to start businesses or start hiring more workers. Did it need to do more to specifically encourage entrepreneurship or hiring? Maybe...that couldn't have hurt. However, I also think the stimulus package became something of a victim of President Obama's ambitious overall agenda. The debate over health care reform in particular has created a lot of uncertainty; arguably, the specter of cap and trade has created just as much uneasiness in the business community. In a way, it's not even so much the particulars of the proposed legislation that has the chilling effect on the economy -- it's the uncertainty and the fear of what MIGHT be enacted and the tax increases that MIGHT be coming. Had some form of health care and climate change legislation been passed quickly (which I doubt would have been even possible given the fractious political environment), I think the economy might have improved quicker. Instead, we've had lingering, paralyzing uncertainty. Ultimately, I suspect the economy would have fared better had the government focused on it ahead of all other priorities, but Obama and the Democrats didn't want to lose the opportunity to pass what they viewed as very important legislation. What they do in 2010 is going to be interesting to see. It's an election year -- do they dare tackle immigration reform as has been whispered or is this the time to focus squarely on the economy? First, however, they STILL have to finish with health care and cap and trade, though.