Stimulus Spending: So Effective That It Works Before It Happens

Jacob Sullum | June 15, 2009

On Friday, anticipating the weekend's meeting of the G8 finance ministers, The New York Times reported that the U.S. economy "might be stabilizing, if not rebounding, even as economic reports in Europe remained gloomy." The front-page story said "the apparent divergence of fortunes between America and Europe highlighted the different approaches to solving the financial crisis, and why some economists say the more aggressive American strategy may be working better." According to the Times, "the most stark" difference between the American and European responses was "Washington's willingness to commit hundreds of billions of dollars to stimulus spending," while European leaders worried that "similar spending would increase inflation in the future." The Times explained that "the argument behind the American approach—staggering stimulus spending—is that the economy must be prevented from falling into a self-perpetuating downward spiral, and that increasing the deficit to do that is prudent."

One problem with attributing America's slightly less bad economic news to the Obama-backed $787 billion stimulus package is that very little of the money actually has been spent. As of a month ago, less than 6 percent of the stimulus money had gone out, and only 25 percent is expected to make its way into the economy by the end of the year. Assuming the spending is spread evenly over that period, less than 9 percent has been spent so far. That's not even one-tenth of an amount that Treasury Secretary Timothy Geithner suggested would prove inadequate.

In the 13th paragraph (the traditional burial spot for crucial concessions), the Times alluded to the problem of effect preceding cause, allowing that "it is impossible to know how much the apparent, if nascent, stabilization of the American economy comes from the stimulus spending and how much from moves like propping up the banking and credit systems, especially because much of the stimulus money has yet to make it to the economy." I'd say 91 percent is a bit more than "much."

Comments

|6.15.09 @ 2:36PM|#

Given that the economy is a collective illusion, the important thing is that the news of the help coming change the attitudes toward the illusion.

Given that we were having a huge crisis in confidence, the bailout saved all of us (like, everybody in the whole world all of us).

Complaining that the money didn't get spent yet misses the point. The point is to get people to change their minds!

(Seriously, I have had people argue this to me.)

|6.15.09 @ 2:44PM|#

Metastimulus!

Wicks Cherrycoke|6.15.09 @ 2:49PM|#

I could have sworn that the self-same Timothy Geitner told us back in February that because of the lag in getting the stimulus moneys out, it would be about two years before the economy would feel its effects.

T|6.15.09 @ 2:51PM|#

I could have sworn that the self-same Timothy Geitner told us back in February that because of the lag in getting the stimulus moneys out, it would be about two years before the economy would feel its effects.

That's what his TurboStimulus program told him when he ran the numbers. It's not his fault.

Wicks Cherrycoke|6.15.09 @ 2:52PM|#

Then again, since the downturn hit the U.S. before it hit Europe, doesn't it stand to reason that we'd start to stabilize first (assuming that we are, of course)?

Chad|6.15.09 @ 2:56PM|#

Yes, the pile of stimulus money that will be coming through the pipes in the next year or so WILL have an effect today. I have seen a number of examples of companies changing their behavior because of the EXPECTED demand increase. They hold on to workers at a loss that they will need later this summer, rather than let them go. They are re-stocking inventories. Investing in technologies they think they will need. Even hiring people.

It's amazing libertarians can claim that the market is all-knowing, but on this issue, are willing to argue that businesses can't see a major honey pot that it just up ahead.

There has always been a balance we must make between spending the money quickly and spending it smartly. I think we are doing a fairly decent job of this.

Hank|6.15.09 @ 3:02PM|#

"TurboStimulus"

You mean Timulus.

Kevin|6.15.09 @ 3:03PM|#

According to the Times, "the most stark" difference between the American and European responses was "Washington's willingness to commit hundreds of billions of dollars to stimulus spending," while European leaders worried that "similar spending would increase inflation in the future."

We haven't gotten to the future yet. So I'd hold off comparing the two approaches until we see if the turtle or the hare crosses the finish line first.

|6.15.09 @ 3:05PM|#

"es, the pile of stimulus money that will be coming through the pipes in the next year or so WILL have an effect today. I have seen a number of examples of companies changing their behavior because of the EXPECTED demand increase."

No linky, no chatty.

Or to put it another way, go peddle your unsubstantiated propaganda elsewhere. That is all.

|6.15.09 @ 3:05PM|#

Hmmmm..... If the expectation of stimulus is enough to cause Good Things, would constant govt threats and doom-mongering result in Bad Things, economically?

Mike M.|6.15.09 @ 3:08PM|#

The jug-eared Messiah and the Congressional democrats are a bunch of lying dickbags, so their lapdogs at the New York Times may as well be just as dishonest.

Xeones|6.15.09 @ 3:10PM|#

...would constant govt threats and doom-mongering result in Bad Things, economically?

No, for some reason that i'm sure Chad will tell us about later.

Mike M.|6.15.09 @ 3:10PM|#

Oh, and Chad easily surpasses joe by miles as being the most pathetic liberal troll on the site.

T|6.15.09 @ 3:14PM|#

Hmmmm..... If the expectation of stimulus is enough to cause Good Things, would constant govt threats and doom-mongering result in Bad Things, economically?

Well, we'd have to go back to a time when the government wasn't peddling apocalypse for a control. When was that, exactly?

|6.15.09 @ 3:17PM|#

No, for some reason that i'm sure Chad will tell us about later.

I eagerly await enlightenment.

|6.15.09 @ 3:18PM|#

Chad seems to be joe with 30% less condescension and 90% less chest-beating and I-won-the-threading. Come on, Chad, pick up your game, dude.

|6.15.09 @ 3:23PM|#

"Oh, and Chad easily surpasses joe by miles as being the most pathetic liberal troll on the site."

And what of Tony?

Xeones|6.15.09 @ 3:28PM|#

And what of Tony?

Tony is not a troll. Tony is the Eschaton.

|6.15.09 @ 3:51PM|#

I have always maintained that stimulus packages work as a placebo to calm and reassure the people while the economy recovers of its own accord.

Naturally, as such, they should not be so large as to actually harm the economy. Usually a routine transportation/infrastructure bill (no larger than the normal annual one, that is) brought out with great fanfare and effusive claims about how many jobs are at stake combined with a token tax cut will do the trick.

That's pretty much what Clinton did (except for the token top bracket boost, which was politically effective for other reasons) and anxiety about the recession ("it's the economy, stupid" - which was odd in itself since the recovery had been going on for at least seven months before the Boy Wonder took office) diappeared for all practical purposes.

Obama, it seems, is not content with the sleight of hand and smoke and mirrors of such political theater. He has turned out, against, I confess, my expectations, to be a true believer in Keynesianism and is determined to give it to us for all it's worth.

We are in for, possibly, the most transformative administraion since FDR. And I thought we'd gotten beyond that crap.

bohica|6.15.09 @ 3:52PM|#

Come on, Chad, pick up your game, dude.

I believe that should be "Step your game up!"

|6.15.09 @ 4:33PM|#

The Associated Press reports on what it gently calls a "quirk" in the so-called stimulus law:

When President Barack Obama increased unemployment benefits as part of his economic stimulus, he also made some Americans ineligible for hundreds of dollars a month in food stamps.

Under the economic recovery plan, laid-off workers have seen a $25 weekly bump in their unemployment checks as part of a broad expansion of benefits for the poor. But the law did not raise the income cap for food stamp eligibility, so the extra money has pushed some people over the limit.

Laid-off workers and state officials are only now realizing the quirk, a consequence of pushing a $787 billion, 400-page bill through Congress and into law in three weeks.And for people hurt by the change, there's no way around it.

This is why it's so important to give these genuises control over our health care right this second!

http://news.yahoo.com/s/ap/20090615/ap_on_go_ot/us_stimulus_food_stamps_2

|6.15.09 @ 4:39PM|#

Jacob,

Let me explain a little about how the government spends money-
First- it signs a contract or a grant. At that time, it records an "obligation."
Second- the person/company/local or state government on the other side of the deal goes out and spends its own funds to do work. Then it submits a bill. Depending on the program and the work, the bills can be submitted incrementally as work progresses and other times the bill can't be submitted until work is complete. The government then pays the bill and records an "expenditure."

Therefore, the government can induce an awful lot of economic activity by signing contracts and grants before money actually goes out the door and is reported as an expenditure.

|6.15.09 @ 5:30PM|#

I have seen a number of examples of companies changing their behavior because of the EXPECTED demand increase.

Or maybe they're changing their behavior because the economy is improving in spite of the stimulus and not because of it (or the economy is not improving, and they're making a mistake). Or maybe, as a human being, you're somewhat susceptible to confirmation bias.

There has always been a balance we must make between spending the money quickly and spending it smartly.

No. The whole idea was to spend massively and quickly, even at the cost of spending it smartly.

It's amazing libertarians [straw-man elided] are willing to argue that businesses can't see a major honey pot that it just up ahead.

Actually, the argument runs the other way. Businesses know that the boost in demand is temporary, and so don't plan for permanent increases in production. Have you really never heard that?

|6.15.09 @ 6:19PM|#

The New York Times reported that the U.S. economy "might be stabilizing, if not rebounding

I vote for "not rebounding". Unemployment continues to rise, mortgage defaults continue to rise, housing values continue to fall, car sales are in the shitter, etc.

All that "green shoot" good news BS is people saying that the numbers for this monthe were merely horrible, and thus better than the projected catastrophic numbers, forgetting, somehow, that the merely horrible numbers are already worse than were predicted a few months ago, and getting even worse than that.

We haven't put the bottom behind us. I haven't seen any real data that makes me believe we can even see the bottom from here.

Chad|6.15.09 @ 6:47PM|#

Marc | June 15, 2009, 5:30pm | #

Or maybe they're changing their behavior because the economy is improving in spite of the stimulus and not because of it (or the economy is not improving, and they're making a mistake). Or maybe, as a human being, you're somewhat susceptible to confirmation bias.

No, I am specifically talking about companies I work for or with. General economic conditions in our industry (chemicals) have stablized. But in things directly related to the stimulus, we are all investing, or at least cutting much less than other parts of the business. There is clear line of sight to the stimulus in many cases. Likewise, I have close connections with a number of academic labs, where the stimulus is going to be a huge boon and is clearly affecting planning and spending.

No. The whole idea was to spend massively and quickly, even at the cost of spending it smartly.

We could spend it as fast as we print it. We didn't. The reason is so that we can spend it more intelligently.

Actually, the argument runs the other way. Businesses know that the boost in demand is temporary, and so don't plan for permanent increases in production. Have you really never heard that?

Imagine you have five employees, but only need three right now. You work in something related to the stimulus, and you expect to need all five people this fall and winter when that money comes through the system, but then guess in the longer term, by next summer, you will only need four people. What do you do?
Probably suck up a short term loss, keep all five people through next spring, and lay one off next year if the situation actually warrants.

What do you do WITHOUT the stimulus? You lay off two people, and if you really need four next year, you hire someone new.

The stimulus is more likely to prevent layoffs than cause new hires at first approximation, but when people stopped getting laid off, confidence returns and the problem starts sorting itself out.

Sean W. Malone|6.15.09 @ 7:09PM|#

People haven't stopped getting laid off Chad. And there's a market-clearing point where, no more lay-offs are possible anyway, but there's no data what-so-ever that indicates any kind of economic growth, much less a bottom to what we've seen so far... besides which, a lot of what government has done thus far serves only to push even worse troubles into the future - e.g. the price of housing has gone down significantly in spite of massive gov't efforts to keep prices high... But the "toxic" assets are still in play here (unless you forgot about those) and still have to be dealt with, so the housing market hasn't remotely bottomed out yet... in the meantime, we're developing yet another artificial, Fed-induced boom (which is what you're really talking about with regard to the companies that are waiting on fat government loot) in the energy sector. All that means is assets continue to be misallocated and the market never clears properly.

I challenge you to find any evidence that the stimulus has done anything but exacerbate the crisis thus far... and as is the point of this article, most of it isn't really even in play yet. When that happens, the side-effects will start kicking in as well. good times.

|6.15.09 @ 7:12PM|#

I'm no fan of TEH STIMULUS, but the argument about expectations of future spending helping the economy recover are not as absurd as many here seem to believe.

To use a negative example, suppose it was discovered that the global petroleum supply would run out in 10 years. Do you think that future expectation (assuming oil production remained constant over those 10 years) would affect the price of oil?

Sean W. Malone|6.15.09 @ 7:28PM|#

From Tim Cavanaugh's article...

"Geithner and Summers promise they will be "reassuring the American people that our financial system will be better controlled."

This is horse pucky. The crisis in confidence and trust is the cure, not the disease. Banks are not lending because there are are too many bad risks out there. People aren't getting loans because they can't establish their creditworthiness. And the reason for that isn't some baloney about mass psychology or people needing to be protected from themselves. It's because about 20 percent of Americans have demonstrated that they must never be loaned money on any terms."

...What he said.

|6.16.09 @ 9:30AM|#

Economy driven (or suppressed) by rational expectations. What's so hard to believe about that?

But you still have it wrong. It's expectation of the "stimulus" that's holding back the recovery. Because it's neither a stimulus or a recovery package. It's PORK that we cannot afford whatever the condition of the economy.

|6.16.09 @ 9:38AM|#

Yes, the pile of stimulus money that will be coming through the pipes in the next year or so WILL have an effect today. I have seen a number of examples of companies changing their behavior because of the EXPECTED demand increase. They hold on to workers at a loss that they will need later this summer, rather than let them go. They are re-stocking inventories. Investing in technologies they think they will need. Even hiring people.

The Obama Stimulus will spend $200M on an airport that is used by less than a dozen people daily. Repaving barely used airstrips, putting up marble plaques of Murtha, etc. I want these companies to lay off their workers. They are creating nothing of value. Much like this stimulus.

|6.16.09 @ 5:56PM|#

STOP THE WASTE IN FRAUD FROM THE STIMULUS, TARPS AND BAILOUT NOW!!!!!!!!!!! $$$$$$$$$$$$$$$$$$$12,000,000,000,000.00 AND COUNTING!
Talk about a Ponzi Scheme, these crooks should be locked away with Bernie Madoff. Heck, they're even worse than Madoff! We are seeing billions be flushed down the Obama sewer. We want our money back before anymore is flushed! Would somebody on either side of politics build a backbone and stop this insane dictatorship?


Also, isn't using taxpayer funds to "bail out" a car company and GIVE it to the unions and a foreign government against the law? Sounds like "Taking" to me. What's with our little smiley-dictator, we already have the Chicago mob in the White House, now he actually is giving their homeland (Italy " I'll make you an offer...") our companies?

Yesterday our smiley man-child dictator said we were 'fear-mongering'? If anyone knows about 'fear-mongering' it
would be old create a crisis Barack and friends!

Yes, having this government in charge of my health care should
certainly be a cause for fear. Look at the great job the government
has done with Medicare and Medicaid. This moron would like everyone to
have poor health care...except for government workers, unions and
politicians.
They say that they're using Medicare as the example, really? I would
suggest that they "fix" the current bankrupt Medicare plan before they
get their dirty little paws in private plans.

Suggestions, questions and random thoughts:

Why would the plan pay for illegals?

For people that do need help, that would again be citizens, take back
the trillions of dollars that Obama is throwing down the tubes in his
hog spending bills. You could buy a whole hell of a lot of private
coverage with the money these robbers and looters wasted or gave their
buds.

Where did that $80 billion in TARP funds go again...the one that
nobody can tell us about.

How about the $$$$22 MILLION dollars a piece for the Chinese Muslim
Terrorists sent To Bermuda
Four of the Chinese Uighurs who trained with al-Qaida affiliates in
Afghanistan have already been moved from Gitmo to the tourist mecca of
Bermuda. This means 13 others will be sent the the South pacific
island of Palua, also a tourist destination.

Then there is the $$901 Million dollars sent to Hamas from our
taxpayers via the UN.

I don't trust this fool and his minions in any way, shape or form and I certainly would never trust them with my health and security so I certain don't trust them with the lives and future of my children.