How Stimulus Fails

A case study of federal waste in Silver Spring, Maryland

It's not hard to make the case that President Barack Obama's $840 billion stimulus was a failure. The economy, which was supposed to recover as a result of the massive spending, has largely remained in the doldrums. The administration's prediction in the event that the stimulus didn't pass—an unemployment rate of 8.8 percent—was exceeded within two months of February 2009, when the bill was signed into law. (At the time, the total cost was said to be $787 billion; that figure was later adjusted upward by more than $50 billion to align with the president's budget.) Democratic dead-enders claim this laughably inaccurate employment projection was based on a lack of knowledge about how lousy the economy really was. They tend to overlook another broken stimulus promise: that 90 percent of the jobs "created or saved" would be in the private sector. In fact, the biggest beneficiaries of stimulus funds have been public school teachers.

These big-picture truths paint a picture damning enough. But to better understand the fallacies of stimulus economics, it helps to take a close-up look at how the money was spent. To capture such a cross-section of stimulus reality, reason.tv went to Silver Spring, Maryland, a suburb of Washington, D.C., that is home to many government contractors and other recipients of money earmarked for the "shovel-ready" projects that were supposed to bring the economy back to life.

The ground rules for stimulus dollars, as laid out by Obama's top economic adviser at the time, Larry Summers, were based on the insights of legendary 20th-century economist John Maynard Keynes. The funds were to be "targeted" at resources idled by the recession, and the interventions were to be "temporary" and "timely," injected quickly into the economy. 

None of that turned out to be true. "Even if you were to believe that government spending can trigger economic growth," says reason columnist Veronique de Rugy, a senior research fellow at George Mason University's Mercatus Center, "the money is never spent in a way that's consistent with the conditions laid out by the Keynesians for it to be efficient."

Infrastructure

The first stimulus project in the nation to get shovels into the ground was the resurfacing of Maryland's Route 650. One reason for the quick turnaround: The job consisted of routine road repairs. That would prove typical of stimulus expenditures.

Obama said the stimulus would put nearly 400,000 people back to work rebuilding America. But in the year after the stimulus was passed, the U.S. construction industry shed about 900,000 jobs, or 14 percent of its work force. The industry still hadn't recovered two-and-a-half years later.

In Maryland, the "specialty trades," a subset of the construction industry that handles big infrastructure projects, have lost an estimated 8 percent of their work force since the stimulus was passed, amounting to 8,000 jobs. Against that backdrop, the state's Department of Transportation says stimulus money for transit projects has paid for the full-time salaries of about 600 construction workers since the middle of 2009.

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Why didn't Maryland's $771 million in stimulus outlays for transit infrastructure have a bigger impact on the local economy? Partly because Gov. Martin O'Malley cut his own infrastructure budget more than enough to offset gains from the stimulus. Maryland's Transportation Trust Fund generally pays for highway repairs by collecting a special gas tax and other user fees. After the stimulus money was made available, O'Malley raided the trust fund, diverting $861 million during the next three years to help balance the state budget, according to information provided by Maryland's Department of Legislative Services. Even with the stimulus, state spending on transit infrastructure has seen a net decrease of $90 million since 2009. 

That sort of scenario played out all across the country. Stimulus dollars were used to cover general expenses rather than activating idle resources.

Government Contracts

A particularly ineffective way to put idle resources back to work is to give money to big government contractors to do more of what they're already doing. Yet that's what happened in downtown Silver Spring. 

Just three firms—Synergy Enterprises, Senior Service America, and Social & Scientific Systems—pulled down more than half of the $138 million in stimulus grants paid to 46 organizations in Silver Spring. While they were receiving a combined $71 million in stimulus, these companies were raking in another $702 million in other government contracts, according to USASpending.gov, a government website that comprehensively tracks federal  spending. The stimulus money was simply a bit more of the same, not exactly a recipe for jolting the economy into action. 

Or consider Palladian Partners, a communications firm in Silver Spring that has received $98 million in government contracts during the last 12 years. The National Institutes of Health (NIH), Palladian's biggest client, tacked $363,760 in stimulus dollars onto an existing contract, then followed that up with two more awards totaling $431,333. Palladian was to spend the money collecting and disseminating information about…how the NIH was spending stimulus money.

With the nearly $800,000 project now 80 percent complete, Palladian has built a website and published 29 original articles on it. The stimulus grant went to hire two new employees, neither of whom was unemployed before coming to Palladian. That's no way to jump-start the economy.

Green Jobs 

The stimulus bill set aside $500 million for a program to train and recruit people for the new green economy. The program promised to place 80,000 people in so-called green jobs. The grant period is more than half over, and the program has placed only 8,000 people in jobs, according to a report by the Department of Labor's inspector general.

In downtown Silver Spring, a union-backed organization called the International Transportation Learning Center received $5 million in stimulus dollars, partly to recruit thousands of new workers and train them in "green job" skills. But because transit workers already enjoy low unemployment and the new green jobs weren't materializing, the group instead received permission to use the entire grant to teach new skills to workers who already have jobs.

"The spirit of the stimulus shouldn't be to get people who already have jobs to get more money to do the same thing, just bigger," says De Rugy. Under stimulus theory, she says, "government spending should be going to places where unemployment is very high, going to people who are poached from unemployment lines."

Weatherizing Homes

"We're going to weatherize homes," Obama said in an interview with CBS on February 4, 2009. "That immediately puts people back to work.…What would be a more effective stimulus package than that?"

According to Keynesian theory, stimulus funds must be spent quickly to be effective. By the president's own account, one of the most "shovel-ready" programs in the package was supposed to be a $5 billion initiative to weatherize 590,000 homes around the country. But according to a February 2010 report by the Department of Energy's inspector general, only 8 percent of the weatherization money was tapped in the program's first year.

In Silver Spring, Gov. O'Malley held a press conference at the house of Sonja and Richard Lowery in June 2009. Theirs was the first home in Maryland to be weatherized with stimulus money. The program then nearly ground to a halt. 

In the first year, Maryland weatherized just 279 homes, 4 percent of its goal. The main holdup was a concession to organized labor that "prevailing wage" rules apply to programs funded by stimulus dollars. That meant weatherization workers had to earn at least the average wage in their area for the work they were hired to do. Before workers could be paid, Maryland (and every other state) spent months conducting surveys to determine the average wages and benefits for workers weatherizing homes in every county. Today Maryland is racing to spend the remainder of its weatherization money before it has to forfeit what's left in early 2012.

"The main lesson of the stimulus is that creating jobs is a very complex process," says De Rugy. "And certainly it can't be directed by a top-down institution that pretty much fails at everything it does."

Jim Epstein is a producer at reason.tv.