Still No Stimulus

The federal economic stimulus bill allocated a staggering $787 billion to save the economy from the Great Depression, Part II. Since February, when the bill was passed, the economy has started to look better. But is it looking up on account of the stimulus bill?

I would argue no. What was sold as stimulus has morphed into a rescue package for state governments rather than a creator of permanent private-sector jobs. Here’s what it means for your portfolio.

President Obama called for the stimulus as a means for job creation. Last winter, he said the stimulus would “create or save” between 2 million and 3 million jobs—90 percent of which would be in the private sector. Well, measured against those goals, the stimulus could hardly be called a success. Through the summer, the unemployment rate continued to rise to 9.7 percent, equal to 15 million out-of-work Americans. Prolonged near-double-digit unemployment could mean a long slog out of the recession.

The stimulus bill has been much too slow to fund projects that increase the country’s productivity. Through early fall, only about $152 billion of the stimulus money had been spent. That’s less than 20 percent of the $787 billion total, and we’re nearly nine months into the “stimulus.” Back in January, the White House estimated that 75 percent of the total funds would be distributed within 18 months. They had better pick up the pace.

To date, the great majority of stimulus spending has been in the form of tax rebates, some tax cuts, the extension of unemployment benefits, and Medicaid funding assistance. Notably, the Government Accountability Office estimated that 63 percent of all 2009 stimulus outlays would go to states to help finance Medicaid programs. This does ease the burden on state government budgets, but it simply isn’t a stimulus. It’s one reason why we continue to see rising unemployment.

Furthermore, research has shown that one-time tax rebates don’t have a lasting impact on consumer spending, which makes up more than two-thirds of the U.S. gross domestic product. During this especially nasty recession, people have used tax rebates to boost savings, not to spend.

One area where the stimulus could have helped? Infrastructure spending. Unfortunately, once the bill made it through Congress, less than 15 percent of its funds were earmarked for infrastructure projects. A massive investment in the nation’s infrastructure would create jobs, improve productivity, and make the United States more competitive in the global marketplace. To make matters worse, through early fall the Department of Transportation had spent only about $2 billion of an allocated $48 billion. In contrast, China’s $585 billion stimulus plan devoted nearly 50 percent of its funds to infrastructure. China’s growth rate is projected to be back above 8 percent next year.