A little over a year ago the new President and his party passed a bill called the American Recovery and Reinvestment Act or as it is popularly known, the stimulus bill. The spending in this bill was intended to offset the effects of the recession caused by the financial crisis. While there is no way to know how the economy would have progressed without the bill we do know how things have turned out with it. Not very impressive if you ask me but after spending some time over at recovery.gov I’m not surprised. One of the specific complaints - before this was passed - about government spending as stiumulus is that it takes a long time for the behemoth that is the federal government to gear up and start actually spending money. And the stimulus bill is a great example.
Remember the phrase timely, targeted and temporary? How does the ARRA measure up to those criteria that we were told were critical for its success? Not so good. According to recovery.gov, as of 6/4/2010 $406 billion has been paid out under the bill; $163 billion in tax benefits, $112 billion in contracts, grants and loans and $131 billion in entitlements. The obvious question is why there is a category called “entitlements” in an economic stimulus bill but a better one is why are we 15 months into this thing and only half the money has been spent? From an economic standpoint what is gained by such a gradual payout? If there are people out of work and this is intended to remedy that, what exactly is the holdup?
What about targeted? Has the money been targeted well? I can find little rhyme or reason to the projects listed in the spreadsheets for contracts, grants and loans on the recovery.gov website. Most of the projects appear to be things that we would have done anyway. Ironically, three of the top five funded projects are directed at the town where I grew up, Aiken, S.C., for nuclear waste disposal at the Savannah River Plant. While this is something that obviously needed doing and I’m happy for my hometown, I don’t see how this positively effects the long term growth prospects of the US economy. Number three on the list is for passenger vehicles bought by the GSA for a over $100 million. Did we really need all these new vehicles? Did we buy them from GM or did we put this out for bid? What is the long term benefit to purchasing these vehicles? Are we just spending money for the sake of spending money? If the funds have been targeted, it is impossible to determine the criteria.
In looking through the description of the projects listed one word keeps cropping up - accelerate. It appears that many of these projects were already planned for later but the ARRA allowed the funding to be accelerated and the projects to be completed now. What do we do when these projects are done? If the answer is that we will find new projects and spend more money the term temporary begins to take on a whole new meaning. The same can be said about the other portions of the bill labeled tax benefits and entitlements. Will the spending in these categories end at some point? Will a future Congress be willing to let tax credits for low income people expire? Should they? President Obama just yesterday called for another $50 billion in “emergency” funding to ensure that teachers, firefighters and other public employees at the state and local level are not laid off. Some portion of the existing ARRA was for the same thing; shouldn’t states and municipalities have been adjusting their budgets for reality over the last year so this federal funding wasn’t required again? If the federal government keeps handing out money with little in the way of requirements for getting local and state budgets under control what are the chances this comes up again next year? Why should the states that have been prudent pay for the ones that haven’t?
There has been a lot of worry recently about the sustainability of the US economic recovery. The developing consensus is that with the stimulus winding down, new headwinds from Europe and China attempting to slow their economy a bit to tame an incipient inflation problem (caused by US monetary policy I might add), the US economy is vulnerable to a double dip recession. To believe that narrative one has to believe several things. First, one has to believe contrary to the evidence that the troubles in Greece, Spain and a few other places in Europe are material to the US economy. As I’ve pointed out a number of times, that just isn’t credible considering the size of those economies and their limited economic interaction with the US. Second, one has to believe that China is willing and able to slow their economy. Considering the political implications of slow growth in China and the fact that the Yuan is still pegged to the dollar, that too is not really all that credible. I suppose it is possible that the Chinese allow the Yuan to appreciate some in the coming months to appease their US Congressional critics but they’ve done that in the past and the effects on growth were minimal. Lastly, one has to believe the stimulus bill had a significant impact on the US economy.
The US economy has not recovered because of ARRA. Yes, it has had some short term positive effects and it has probably mitigated at least somewhat the drop in consumption. But it isn’t consumption that creates long term growth; that will only come from making long term investments that improve productivity. If we had dedicated the entire stimulus to improving our infrastructure, I might be more positive about its long term effects but as constructed it failed miserably on that score. Half of the funds have yet to be spent but if they are spent as badly as the first half I would not expect much positive effect. On the other hand, I also wouldn’t expect the end of the spending to have much negative effect.
What will really affect the US economic recovery is whether companies and individuals gain enough confidence to invest. The amount of the stimulus bill pales in comparison to the investment funds available to individuals and corporations. As the Fed recently reported, US corporations (non financial) are holding record amounts of cash, some $1.84 trillion. That amounts to the highest proportion of assets held in cash since 1963. The $400 billion already spent by ARRA and the $400 billion yet to be spent are not insignificant sums but when compared with the size of the overall economy the amounts just aren’t enough to have much impact. On the other hand, the amounts of cash held by corporations and individuals is in the trillions and a much larger percentage of the economy. If we are to keep the economic recovery going our choice is to either do something to convince corporations and individuals to invest or pass a stimulus bill that is both larger and more effective than the last one. Which seems more likely?
Companies are not investing in equipment or personnel because they are skeptical about the recovery but the more they delay investing, the more likely it is the recovery falters. Furthermore, because of concerns about the federal debt - highlighted so conveniently by the implosion of the Greek economy - another stimulus package would seem to be counterproductive. Therefore it is critical to analyze why exactly companies are reluctant to spend and address those issues quickly. I don’t think it is just a matter of a simple fix; for instance, we can’t just change tax incentives for investment and restore confidence, although that might not be a bad place to start. Surely if we need investment, raising the capital gains tax next year should be reconsidered.
At this point, I think almost all of the economic levers available to government are being questioned. Would companies be more likely to invest if they felt more confident that Wall Street firms would not do something stupid and blow up the economy as they did in 2008? I think they would so maybe we need to get financial regulatory reform not only passed but we need to get it right. What I see coming out of DC right now will not get the job done. No one except the lobbyists who wrote it understand it and there is a suspicion that it doesn’t accomplish much. Would companies be more likely to invest if the Federal Reserve didn’t appear to be repeating the same mistakes that got us in this mess? I think so and the implications of that are far reaching and way beyond a weekly commentary. Would companies be more likely to invest if they knew what a future employee would cost? Would they be more likely to invest if they knew what climate legislation would do to the cost of energy? Would they be more likely to invest if they knew what individual tax rates would be next year? Would they be more likely to invest here if repatriating foreign profits didn’t trigger a giant tax bill?
The problems facing the economy are considerable but I see no reason to expect a double dip recession. Unless the uncertainties holding back investment are resolved I see no reason to expect more rapid growth either. The most likely outcome is more of the same - slow growth and slow job creation with companies and individuals more interested in preserving their wealth than creating more (as evidenced by the firm price of gold). Until some of the uncertainties surrounding future economic policy are resolved that is probably the best we can hope for.
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