Stimulus bashing is big sport among Conservatives and anti-Obama, anti-government ideologues. The media, mostly led by Fox News, have distilled the main talking points down to empty sound bites that basically purport to say the stimulus didn’t work. You’ll hear things like “Obama spent a trillion dollars and it did nothing. All he did was put us more in debt.”
Well, I’ve already debunked that whole, “stimulus did nothing” fallacy with my chartbook, which showed exactly what happened to the economy. I examined a bunch of different metrics and they all showed the same thing: once the stimulus was enacted the severe downturn was immediately arrested and everything turned up. Everything. So those who say that the stimulus did nothing are just spouting pure ideological nonsense. Comments like those are totally hollow.
Some of the people on the right who are intellectually honest or not comfortable looking stupid, will refrain from saying the stimulus did nothing. Instead, they’ll take a different tack. They’ll simply say the results were weak. They’ll say something like, big deal, we got the weakest recovery on record and it “cost” us a trillion. How great is that?
Fair enough. In some respects the recovery was weak. The rebound in real GDP from the trough in 2009 was about 5% where on average, rebounds have been about 9% since the 1930s. If you strip out the powerful, New Deal and WWII spending booms, rebounds have been more like 7% from their troughs. So, yes, it was less, but not hugely less. And I guess you can argue that we still have a slow recovery in housing and unemployment rate remains stubbornly high, so that’s not something to brag about either.
Yet in many other respects the recovery has been impressive. Stock indices have doubled, household net worth jumped by $11 trillion and corporate profits have hit new record highs to name just a few things. The problem, however, is that is a lot of people haven’t participated in the good things because policies have favored profits, capital and the corporate sector, over workers and wage earners.
It’s not hard for people to discount the stimulus because they don’t know where all the spending went. I’m sure even a lot of economists don’t know. What was the breakdown of that spending? To begin with, let’s start with the total funds allocated, which, according to the government’s own numbers, was $840 bln. That equates to about 5% of GDP. It’s really not a very big number. Consider that we have run up a tab of around $2 trillion fighting wars in Iraq and Afghanistan. That’s more than twice what we spent on the stimulus yet we were facing the most severe economic collapse since the Great Depression.
Next, a lot of money that was spent was spent in the first year. After that the spending started to trail off. So we got a big boost initially and then things flattened out. Insofar as the breakdown of the numbers it’s all available at the Recovery.gov website. I will provide a summary here, but feel free to check these figures out in detail when you have time.
Out of the $840 bln, about 35% or, $290.7 bln was pure tax credits. It was not direct spending, per se. These tax credits included the first time homebuyer tax credit, Making Work Pay tax credit, earned income tax credit, as well as some tax incentives for businesses like accelerated depreciation. In other words, more than a third of the entire $840 bln stimulus went to tax credits, meaning that you had to have income or be eligible for those credits in order to get the benefit. Lots of people got nothing out of it at all. That wasn’t very smart.
The next portion of the stimulus, which amounted to $246 bln, went to contracts, grants and loans. This included spending on education, training, special education, rehabilitation services, as well as transportation (highways, rail) and infrastructure. A lot of other things were included, but the bulk of the money went for education, about $90 bln. In contrast, highway and infrastructure projects, which in many cases led to immediate job creation, had only $36.5 bln and $30.4 bln allocated, respectively. This is a pittance when you think about it. Our roads are crumbling, our bridges and tunnels are crumbling yet all we can muster is a pitiful 0.5% of GDP for repair.
The third and smallest tranche of the stimulus went to entitlements. That amounted to $238 bln for Medicaid, Medicare, unemployment insurance, family services, housing grants and agriculture. Out of this amount the largest chunk went to Medicaid grants to the states and the tab there was $95.2 bln.
That was it. That’s where all the stimulus money went. More than a third of it was for tax credits that most people didn’t get and the rest was divided up into a smattering of programs and projects that had only a limited effect on aggregate demand. Even so, it was enough to halt the economy’s slide and cause growth to return. And the growth remains still, thanks to the stimulus, which was, inarguably, the catalyst. Clearly lots more could have been spent. We could have been much more aggressive when it came to making the investments we needed like repairing the nation’s infrastructure, building schools and hiring teachers, financial aid to states, basic R&D, alternative energy and so on. That would have resulted in a much more powerful recovery and a significant drop in the jobless rate, but timidity and dogma kept us from doing that. Misinformed cries about the deficit from people who have turned out to be wrong on everything.
And now what are we doing? Instead of looking at these facts and saying, it worked and we ought to do it again, only bigger and bolder, we’re saying, “No! We must impose austerity on ourselves.” It’s sheer lunacy. The result will be a weak economy that lingers for years and years, creating more and more unemployment, poverty and social unrest. This is the true legacy we will pass along to our kids; not the debt.