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Argument: 2009 US stimulus lacks short-term spending for immediate stimulus

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"Obama Ducks Hard Choices". Newsweek. February 2, 2009 - As it turns out, President Obama didn't make the tough choices on the stimulus package. He could have either used the program mainly (a) to bolster the economy or (b) to advance a larger political agenda, from energy efficiency to school renovation. But Obama wanted both, and, superficially, the two can be portrayed as an enlightened partnership.

"This is not just a short-term program to boost employment," Obama said recently. "It's one that will invest in our most important priorities like energy and education, health care, and a new infrastructure that are necessary to keep us strong and competitive in the 21st century."

In its releases, the White House gushes superlatives. The stimulus program, says one fact sheet, "launches the most ambitious school modernization program on record," "computerizes every American's health record in five years" and "undertakes the largest weatherization"—insulation—"program in history." What a bonanza of good stuff!

Unfortunately, investing in tomorrow won't automatically stimulate the economy today. The $819 billion program passed by the House would only slowly provide stimulus. The Congressional Budget Office estimates that in fiscal 2009 (through this September) about 21 percent of the new spending and tax cuts would flow to the economy. For 2010, the estimate is an additional 44 percent. The total of 65 percent means that, by the CBO's estimate, about a third of the $819 billion package would be spent after fiscal 2010. That falls far short of Obama's stated goal of 75 percent in the first 18 months.

One reason is that some of Obama's "investments" won't occur quickly. The "smart grid" would be one. Or take the $39 billion in the House bill for added highway and transit construction. That's nearly double existing funding levels. When queried, state officials worried about how fast they could "adjust their contracting procedures" for such a big increase, reports the CBO. As stimulus, the better course would simply be to give more money to states and localities— and order them to spend it. Most would plug deficits, avoiding program cuts and layoffs.

What's also sacrificed are measures that, though lacking in long-term benefits, might help the economy now. A $7,500 tax credit for any home buyer in the next year (and not just first-time buyers, as is now in the bill) might reduce bloated housing inventories. Similarly, a temporary $1,500 credit for car or truck purchases might revive sales, down a third from 2007 levels. Normally, these targeted incentives would be unjustified; today, they may be necessary expedients.

Kevin Murphy. "There's No Stimulus Free Lunch". Wall Street Journal. February 10, 2009 - It's hard to spend wise and spend fast.As President Barack Obama recently said, "This plan is more than a prescription for short-term spending -- it's a strategy for America's long-term growth and opportunity in areas such as renewable energy, health care and education." Such spending may encourage long-term growth, but it will have little short-term effect on GDP.

So our conclusion is that the net stimulus to short-term GDP will not be zero, and will be positive, but the stimulus is likely to be modest in magnitude. Some economists have assumed that every $1 billion spent by the government through the stimulus package would raise short-term GDP by $1.5 billion. Or, in economics jargon, that the multiplier is 1.5.

That seems too optimistic given the nature of the spending programs being proposed. We believe a multiplier well below one seems much more likely.

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