The Failure of Obama's Stimulus

Big spending has only produced bigger government.

No one spends money like the federal government. This year alone, it will shovel out $3.7 trillion, which works out to $7 million a minute. So it may surprise you to find out the clearest lesson from the Obama administration's fiscal stimulus program: The government is not very good at spending money.

On the contrary, it's slow and clumsy. Nearly a third of the $787 billion package, signed into law in February 2009, was assigned to infrastructure projects—from fixing roads and building bridges to weatherizing buildings and upgrading electrical grids.

The idea was to simultaneously improve our physical facilities while putting people back to work, which in turn would provide a badly needed surge of adrenaline to the overall economy. But it hasn't quite worked out that way.

The Wall Street Journal reports that 19 months after the plan was approved, federal agencies have managed to use only one-third of the infrastructure money. Federal contracting rules and labor requirements are among the hurdles that have slowed the process down.

This is not entirely unexpected. The Congressional Budget Office said before the program was approved that less than half the infrastructure money would be spent in the first two years.

That's always been one of the big problems with using fiscal policy—changes in spending and taxes—to manage the level of activity in the economy. By the time a policy takes effect, it may be too late to serve the original purpose.

Supporters insist there's no such danger this time, since the economic recovery has been feeble and promises to remain that way. A Bloomberg survey of economists found that most expect the unemployment rate to stay above 9 percent until 2012.

But if that's true, it doesn't say much for the potency of fiscal policy in boosting short-term growth. Obama's program, after all, is the biggest stimulus package, as a share of the economy, in our history. Yet it has landed with the force of a damp sponge.

If the slow-arriving infrastructure spending were the only component, the weak comeback might be understandable. But the other components of the American Recovery and Reinvestment Act were designed to get money out in a big hurry.

The program included $282 billion in tax cuts, which took effect immediately to boost the take-home pay of workers. It also furnished $140 billion in aid to state and local governments, so they could maintain programs and avoid mass layoffs of public employees.

What's wrong with those elements? For one thing, there is no compelling evidence that they function as intended. Tax cuts are supposed to induce consumers to spend more, but past experience indicates that people use most of the windfall to increase their savings or pay down debts—neither of which puts people back to work.

A recent study for the National Bureau of Economic Research, by Joel Slemrod and Matthew Shapiro of the University of Michigan and Claudia Sahm of the Federal Reserve Board, says that's exactly what happened with Obama's tax cut. The effect on spending, they concluded, was "modest at best."

Giving money to states and municipalities to spare them from firing teachers and slashing social programs undoubtedly achieves that simple purpose. But when it comes to generating economic activity, it's flying on a wing and a prayer.

Economists William Gale and Benjamin Harris of the Brookings Institution and Alan Auerbach of the University of California, Berkeley, note in a new paper that "while the argument for transfers to states being stimulative is plausible, there is surprisingly little evidence on the countercyclical effects of federal transfers to states."

It is safe to say, though, that they have a destructive impact on taxpayers. During good times, states and cities tend to enlarge their budgets, rather than put money away for a rainy day. Economic downturns serve as a corrective by forcing these governments to eliminate low-value programs to live within their new constraints.

When the federal government bails them out during a recession, it spares them this unpleasant obligation. It invites them to keep spending more than they can really afford.

Of course, the use of deficit spending as a cure for recession has the same effect at the federal level—reinforcing our leaders' habit of loading debt onto future generations.

As a way of expanding the economy, it's a proven failure. But as a way of expanding government, it's definitely a keeper.

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