Down the Drain

How the federal government flushed away the $833 billion stimulus

If you want to see where a little bit of your $833 billion stimulus went, head south from St. Louis on Interstate 44 until you reach the Mark Twain National Forest. On March 13, 2009, less than a month after President Barack Obama signed the American Recovery and Reinvestment Act (ARRA) into law, the federal government awarded $462,912.30 to a Spokane, Washington, construction firm called CXT Incorporated to build and install 22 “precast concrete toilets” in the park. 

These bunker-style commodes did not add to the number of bathrooms in the forest; they replaced existing toilets that didn’t meet Forest Service condition standards or accessibility requirements. And they were not just isolated outhouses. New Mexico got $2.8 million to spend on new toilets in its national parks. Another $42 million went to upgrading toilets and other sanitation facilities in Alaska.

The stimulus wasn’t sold as a plan to build bathrooms. “We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels, fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead,” President-elect Obama said in a November 2008 address. The stimulus, Obama vowed, would “put people back to work and get our economy moving again,” creating between 2 million and 2.5 million jobs. Instead, the economy followed the money right down the drain. 

What went wrong? Plenty. The stimulus was rushed to passage based on economic assumptions that remain hotly contested. Its implementation was marred by politics, logistics, and red tape. And the aid it directed toward the country’s least well off may have undermined the very recovery it was designed to hasten. This is what happens when politicians insist that something big must be done, even if they’re not sure what that something should be.

The Rush to Stimulus

The march to the stimulus began on the 2008 presidential campaign trail. “Instead of doing nothing for out-of-work Americans,” Obama said in April 2008, “we need a second stimulus that extends unemployment insurance and helps communities that have been hit hard by this recession.” Obama framed his call for stimulus as a follow-up to the $152 billion tax rebate George W. Bush signed into law in February 2008. That plan cut most Americans a $600 check. 

Candidate Obama called for something more proactive: Washington-directed, socially conscious spending on education, alternative energy, and transit projects would replace the usual Republican prescription of tax breaks only, allowing government to “grow the middle class by investing in millions of new green jobs and rebuilding our crumbling infrastructure.” It was more a  grab bag of longstanding liberal wish list items than a focused spending injection tied to a specific economic theory. 

Soon after Obama won the presidential election in November 2008, his advisers spent a day walking him through the ugly economic realities of the recession. One of the presentations came from Christina Romer, soon to be the head of the president’s Council of Economic Advisers. As Michael Grabell reports in his book Money Well Spent?: The Truth Behind the Trillion Dollar Stimulus, the Biggest Economic Recovery Plan in History, which this article draws upon substantially, Romer warned the president-elect of a chilling possibility: that America’s economy would plateau but struggle through a decade of weak growth, much like Japan. It was a warning that would prove unintentionally prophetic. 

Obama indicated he was willing to be flexible regarding the details of a stimulus plan, but he made one thing clear. “What is not negotiable,” he said, “is the need for immediate action.” Romer took the lead on designing the plan. 

Her recommendations had goals similar to those of Bush’s tax rebates: Boost output by injecting money into the economy to stimulate consumer demand, and therefore jobs and growth. The hope was to create a “multiplier effect,” in which each dollar of stimulus creates more than one dollar of economic activity through a virtuous feedback loop. 

But in addition to having the government rather than consumers spend most of the money, Romer’s plan differed strongly from Bush’s in one key respect: scale. It was several times larger than any stimulus proposed in 2008 by any prominent politician. On the campaign trail, Obama’s Democratic rival Hillary Clinton had proposed a $30 billion stimulus. Then-House Speaker Nancy Pelosi (R-Calif.) put together a $150 billion proposal. Some economists pegged the necessary amount closer to $300 billion, an estimate of how much it would take to get the economy back to its full potential—a figure referred to as the “output gap.” 

But Romer estimated that the amount needed to fill the gap was well north of $1 trillion. She pushed for a multiyear plan that would include a combination of infrastructure spending, increased funding for transfers such as Medicaid and unemployment benefits, bailout money for budget-hammered state governments, and tax breaks that would trickle out paycheck by paycheck over several years. 

Political considerations eventually knocked the price tag down to about $787 billion (a figure later revised upward to $833 billion), but it was still the largest and most ambitious recovery plan in the history of the world, putting the country’s already extended finances much more deeply in the red. Yet not only did the president’s economists not know if it would work; they might never be able to judge whether it had. 

That didn’t stop them from predicting success. In January 2009, Romer and Jared Bernstein, who would go on to be Vice President Joseph Biden’s top economic adviser, projected that without the stimulus unemployment would hit 9 percent and stay there for nearly a year, but that with a recovery plan unemployment would peak at 8 percent and drop below 7 percent within a year. Of the new jobs created, 90 percent would be in the private sector. Those projections were quickly revealed as fantastically optimistic: The unemployment rate would climb to 10 percent in October 2009 and hover near that level for another year, while millions of people simply stopped looking for work. 

Stimulus supporters still deem ARRA a success in forestalling another depression. But you can’t claim success unless you can measure it. And when it comes to massive economic interventions like the stimulus, that’s exceedingly difficult to do. 

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  • Dweebston||

    [teleprompter voice]
    We must... do more... than ever before... to ensure out-of-work Americans stay that way.

  • george68||

    Start working at home with Google! It's by-far the best job Ive had. Last Monday I got a new Alfa Romeo from bringing in $7778. I started this 9 months ago and practically straight away started making more than $83 per hour. I work through this link, mojo50.com

  • Palin's Buttplug||

    slightly OT - Santorum hospitalized for bowel disorder

    http://www.washingtontimes.com.....iowa-trip/

    interrupts Presidential campaign trip to Iowa.

  • ||

    Now that is pretty damn funny.

  • Ron||

    Its a big government so it must do big things to prove the value of its larges even if those large things break the camels back.

  • Sevo||

    "What went wrong?"
    Wrong question. Right question:
    "Did anything go right?"

  • DarrenM||

    It would certainly be a much shorter list.

  • Karl F||

    Before the ARRA stimulus we were losing 800,000 private sector jobs a month and the number of job losses was growing. The economy shrunk in the 4th quarter of 2008 at a 9% annual rate. After the stimulus, GDP started growing within six months. Job losses began declining, turning to job gains within a year. We have now recovered over six million private sector jobs. Without the ARRA stimulus, we likely would have lost millions more jobs.

    So yeah, a few things have gone right.

  • IT||

    We normally come out of recessions much faster - without such intervention - so I would say ARRA was a net drag.

  • ||

    Create or SAVE 2 to 2.5 million jobs.

    That word is important, so don't leave it out. You can't play imaginary-fun-time without it.

  • Gorilla tactics||

    global cooling, global warming, climate change, climate chaos

    jobs created or saved

    Remember if you can't falsify it by constantly moving the goal posts it can never be wrong!

    "it would have been worse had we NOT done something"

  • setTHEline||

    "it would have been worse had we NOT done something"

    Exactly. You can NEVER win this argument with a liberal, because they'll claim counterfactually that the world would have exploded without stimulus, therefore it is a de facto success. Real measurable benefits are only a bonus folks, now bow down and thank the noblemen and magistrates for allowing your continued existence.

  • Doctor Whom||

    From where our benevolent overlords and their self-appointed shills are sitting, the stimulus gives every appearance of having been a success. It wonderfully stimulated the economy of D.C.

  • MacKlingon||

    It could have been worse, he could have made a million millionaire's drawn from the welfare rolls. That would have acturaly helped but may have reduced his voting block.

  • Politics Debunked||

    Although this doesn't establish cause and effect, simple data and graphs show that in the US and around the world *most* of the time the faster government spending grows, the slower the private economy grows. The slower government spending grows, the faster the private economy grows. The method to see this is easy, it doesn't require fancy statistics and it is easy for the spreadsheet savvy to confirm themselves from government data sites themselves.

    See the new page:
    http://www.politicsdebunked.co.....ingpattern
    for details.

    Usually you would expect that increased taxes due to growth, and increased welfare spending leading to increased consumer spending, would lead the two parts of the economy to grow at the same rate usually. The fact that they don't means there are major factors at play (and the article addresses the fact that this is likely not due to intentional "stimulus" spending since countries aren't usually in recessions).

  • The Late P Brooks||

    That money wasn't "flushed away" it was targeted with pinpoint accuracy at papering up the cracks in state and local government budgets.

  • Gorilla tactics||

    Well obviously it has to be three times bigger-Krugabe

  • ||

    NEEDZ MOAR STIMOOLUSS

  • ThatSkepticGuy||

    INFINITE DOLLAH BILL!

  • John Thacker||

    Then-House Speaker Nancy Pelosi (R-Calif.)

    Um, editing?

  • Sevo||

    Naah.
    Attempt at stress-induced mind-failure.

  • IT||

    Now that would be a RINO.

  • Zenjuris||

    The problem is even worse than the article describes. The stimulus was sold to taxpayers back in 2008 as a one-time emergency measure. However, annual federal spending not only did not return to prior levels after the stimulus ended but instead continued to increase. The one-time increase effectively became a permanent annual increase. It's the gift that keeps on taking.

  • MoreFreedom||

    How unfortunately true. It's become a permanant stimulus of $800 billion every year, and the economy is responding, it's dying a slow death.

  • Legate Damar||

    I'm not sure why there's such disdain for upgrading toilets. Sure, it provides comically little value for the money spent, but in the end, the new toilet is some amount (possibly significant, possibly not) better than the old one. Too much of the money in such a way that literally no improvement resulted. Unnecessary tile upgrades and $600 ARRA road signs are nothing more than wealth transfer from future taxpayers to current contractors. When my nephew is old enough to ask me what $800 billion dollars bought us, I'd rather point to a toilet in a nature preserve than someone else's second home in Aruba.

  • Charlotte Falcon||

    Peter:

    Good article. I’ve always had a question about the stimulus for which I can’t find a simple answer:

    is the stimulus now baked into the budget baseline? If so, are we spending approximately $800 billion a year on stimulus

  • DarrenM||

    What you really want to know is what would have happened if there had been no government spending at all. But macroeconomists cannot conduct the sort of controlled experiments that their counterparts in the world of microeconomics do all the time.

    That's what makes macroeconomics so fun. No one can prove you wrong.

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  • Gabriel Hanna||

    The multiplier effect comes from two premises:

    People are preferring to save or invest rather than spend.
    The increased government spending is borrowed, not taxed.

    Once you assume those two things, the multiplier follows straightforwardly from the geometric series. Here's the problem--every dollar borrowed today must be repaid tomorrow, with interest, using money that is taxed. Borrowing to repay the loans just defers the taxation and increases the number of dollars which must eventually be repaid.

    So the multiplier effect, even granting all the premises that proponents of increased spending consider most favorable, can only bring tomorrow's prosperity forward to today, it cannot create new prosperity.

    Eventually the reckoning comes due, in increased taxation or in inflation.

  • Sevo||

    There is a further problem.
    In any voluntary exchange, both parties have traded a good which they value less for a good which they value more; both parties have found additional value and humanity has found additional wealth.
    Taxes are *NOT* voluntary, so any use of taxed money first has to compensate for that missing increased value.

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  • Pundit Pete||

    You might like this song that my friend Mark Quick wrote called:
    Where Did All Our Money Go? which I posted on my blog.

    http://punditpete.blogspot.com.....riter.html

  • tbraton||

    "That didn’t stop them from predicting success. In January 2009, Romer and Jared Bernstein, who would go on to be Vice President Joseph Biden’s top economic adviser, projected that without the stimulus unemployment would hit 9 percent and stay there for nearly a year, but that with a recovery plan unemployment would peak at 8 percent and drop below 7 percent within a year. . .Stimulus supporters still deem ARRA a success in forestalling another depression."

    The Romer/Bernstein piece you refer to appeared in January 2009 and made the point that, if no stimulus package whatsoever were passed, the unemployment rate would go only slightly higher, would begin to decline in the near future and would come very close to the unemployment rate with the stimulus package by 2014. (The Romer/Bernstein chart was reproduced in a Paul Krugman column. http://krugman.blogs.nytimes.c.....-stimulus/) The concession that the economy would have recovered without any stimulus package, albeit slightly later and with slightly higher unemployment rate, gives the lie to the preposterous proposition that Obama saved the U.S. from a "second Great Depression." Ms. Romer's opinion must be given some weight since she is a professor economics at University of California/Berkeley specializing in business cycles.

  • Dean 402||

    The Congressional Budget Office added the $833 billion stimulus amount to the baseline budget. Instead of paying for the stimulus just once, taxpayers get to pay for it each fiscal year. The government just grew and absorbed the stimulus amount, even though she was getting along just fine on $833 billion less before the stimulus was passed.

  • Gabriel Hanna||

    They don't dare take it out. That's the problem with deficit spending.

    The government borrows a dollar that was not getting spent and spends it. That produces a multiplier.

    When the government raises taxes to pay back the dollar, it takes the dollar and its multiplier back out. When the government spends a taxed dollar, it takes the dollar and multiplier out and puts it back in, for a wash. If the government doesn't borrow and spend an unspent dollar next year, the dollar and its multiplier go away.

    It's a game of tiger-by-the-tail played from year to year. The government can't stop borrowing unspent dollars until there's enough prosperity to pay for the contraction caused by stopping the spending or paying back the borrowing with tax money.

    As long as the government thinks people are sitting on their money, they will be afraid to reduce spending. And so the reckoning gets put off longer and longer, and it will be bigger and bigger when it comes, and it may be that no amount of future prosperity will be enough to cover what we've already brought forward.

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  • SouthernRoots||

    Due to continuing resolutions, that $833 billion was "enshrined" in spending since 2009.

    If $85 billion in sequester cuts can result in the loss of 700,000 jobs, then where are all of the jobs that $700 billion x 4 years ($2.8 trillion or so) should have created - somewhere in the area of 23 million jobs, if the sequester scare numbers have any meaning.

  • Blacksaint||

    Stimulus and Bailouts.

    Where did all that money go?

    It went to Democrat contributors, organizations (ACORN), and unions -- including billions of dollars to save or create jobs of government employees across the country.

    It went to buy the votes of GM and Chrysler so that their employees could keep paying union dues and vote Democrat.. It went to AIG so that Goldman Sachs could be bailed out (after giving Obama almost $1 million in contributions). A staggering $125 billion went to teachers (thereby protecting their union dues).

    All those public employees will vote loyally Democrat to protect their bloated salaries and golden pensions that are bankrupting America.

    The country goes broke, future generations face a bleak future, but Obama, the Democrat Party, government, and the unions grow more powerful.

    The ends justify the means.

    Add it up and you've got the perfect Marxist scheme.

  • T Clark||

    What a lame article. It's titled "Down the Drain," which implies that the money was wasted. But the substance is that determining whether there was any value to the stimulus is almost impossible to tell.

    Let's try some reason:
    1) The administration says the stimulus worked.
    2) It is very difficult to tell if the stimulus worked.
    3) Therefore, the stimulus didn't work.

    You really need to change the name of your magazine and web page.

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  • mynet sohbet||

  • kenih||

    After six months of being unemployed your chances of getting a job drop by around 50%. Obama was giving subsidized health care and extended unemployment for 2 years. I believe he did this because he really wanted to help American's that were struggling to get by. Ironically however what it did was give incentives to American's to take their time to get another job. This in turn put millions of American's into the "6+ month" category making them effectively un-employable. So by helping he wound up destroying the lives of millions of American's who will never work again.

    Most people have heard the proverb about the fish i.e. give a man a fish and you feed him for a day. Teach a man to fish... Obama gave out a LOT of fish and now he has a lot of desperate people that need more fish.

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