Why the Stimulus Failed to Stimulate

There are two ways to for the government to try to directly stimulate the economy. One way is to give money directly to people through tax cuts or a tax rebate. The other way is to ramp up government spending.

Proponents of this second way insist that giving money directly to the population means that a larger percentage will be "wasted". Instead of being spent, it will be used to pay down debt or simply put in the bank. These people say that the modest stimulus passed under President Bush in 2008 was an inefficient use of the money. That is why the stimulus bill passed in 2009 was structured completely differently. The promise was that it would be targeted so that all of the money would be spent which would cause a multiplier effect.

So what actually happened?

The stimulus bill was actually a combination of programs. One extended unemployment payments. Another was a bail-out for states. Neither of these produced any additional spending. They simply continued existing spending. By Keynesian standards, these portions were a failure. That is why the Obama administration uses the phrase "jobs created or saved." They figure that without this money, spending would have dried up even more than it did causing additional job losses. It should be mentioned that there is some evidence that long-term unemployment programs increase the unemployment rate. People with money coming in are less likely to settle for a lower-paying job.

Another large portion went into a tax cut known as the Making Work Pay Act. This reduced taxes on the weekly paycheck by a modest amount. The theory was that the amount would be so small that it would be spent without thought rather than being used for something specific like paying down debt. It is hard to say how successful this was since an extra $5-$10 a paycheck will not induce someone to buy a house or even a major appliance.

Out of the rest of the stimulus, the best known programs are the "shovel ready" construction jobs, the Cash for Clunkers, and the Green Energy initiatives. How have these fared?

Recently President Obama admitted that there is no such thing as a "shovel ready job." This is in contrast to statements he made in 2008 when he assured the country that the states had numerous jobs that were all set to go as soon as they received funding. What was he talking about and where did the money go?

Construction jobs take time to put together. You have to do estimate the cost, identify the funding source, put the work out for bid, and award the contracts. Only then can you break out the shovels. Notice that projects have to be funded before you get very far. A lot of the shovel ready projects were going to happen, anyway. The governments simply used federal funds to pay for the work and saved the money that had already been set aside. There is absolutely no stimulus effect for this money since it paid for work that would have happened anyway. Now, some of the money that was saved was spent on later projects. A city might have doubled the number of miles of roads that it repaved. That would result in some eventual stimulus. In other cases, the money was simply saved or used to prevent cuts elsewhere. In these cases there was no stimulus. Bottom line - the shovel ready jobs were no more likely to stimulate the economy than giving the money directly to the people.

Cash for Clunkers is an interesting case. It was far more successful that was planned. The original idea was to get some old, polluting cars off the road and replace them with newer, more efficient cars. This was actually environmental legislation buried in a jobs bill. At it turned out, the bill caused a massive, temporary spike in car sales. It was so successful that Congress had to add additional money into the program. So, does that make it a success? No. Remember that it was supposed to get old, inefficient cars off the road. As implemented, it was possible to use it on a car that only got marginally better millage. Figure in the energy needed to produce the new car and you may have made things worse. But it helped the automotive industry, right? Yes. It was particularly good for the Japanese car makers. GM and Ford saw some increase. Chrysler didn't get much of a bump at all. Plus, it mainly shifted sales. People planning on buying a car in late 2009 or 2010 bought one under Cash for Clunkers. And all of those "clunkers" were demolished, taking the used car supply with them. Worse, the government could probably have given out smaller incentives for the same increase in sales. To add insult to injury, the places that got the construction work had nothing to do with where unemployment was the highest (probably because areas with high unemployment did could not afford to have construction projects already in the pipeline).

Finally, we have the Green Energy initiatives. Wind farms have created tens of thousands of jobs. Except, many of those jobs are temporary construction jobs that came and went before the stimulus was passed. It turns out that the standards were written fairly loosely. It does not matter when the work was done, all that matters is when the last generator is put into production and the wind farm is declared "on line." So, there are dozens of wind farms that were built in 2008 and 2009, before the stimulus, that still received credits equal to a third of their construction costs and are being counted as jobs created or saved. No stimulus effect.

Considering all of the places that the stimulus leaked money without actually doing any stimulating, we would have been better off just writing a check to the American people. That would have amounted to more than $2,600 per person. Imagine the stimulus effects of amounts like that being spent at once by three hundred million people.