Why Isn't The Stimulus Stimulating?

[Marokai Backbeat]

The stimulus "isn't stimulating" because it was too small and compromised too much of tax cuts (or rebates, or breaks, or whatever semantic game you want to play) and didn't focus enough on the critical projects and safety-net programs that are incredibly effective in this area. I've explained this before, and I'll quote myself from another thread here just to repeat myself.

(By the way, some of the assumptions in this article are just flat wrong, unemployment insurance is incredibly effective and stimulates the economy efficiently, as food stamps do, and not all projects take years to plan. If you're building a dam, obviously it's going to take awhile, but there are alot of projects out there that can be done right now, or have stalled out due to lack of funds. There's also no shame in planning & building alot of projects for the future economic benefit.

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We've accomplished a great deal in a short time with past infrastructure projects such as the WPA, and it's all possible again, if we actually created large programs such as this to do it, and poured alot money into a very sensible and direct Administration. Remember, we're not designing a thousand freedom towers. We could be digging ditches, repaving roads, repairing and rebuilding schools, finishing already-existing projects, and so on. These are stimulative not only now but forever.)

The stimulus will take time to come into full effect (construction projects are getting started in many areas of the country right now, and I've personally seek the increase in some safety net benefits like unemployment compensation and food stamp increases) however it's important to keep in mind that it was probably woefully inadequate.

Government spending is the most efficient way in these times (in one way or another, usually target spending or goods and services directly, accompanied by public works projects) and if the spending is kept under a certain limit pretty much "just because" and hampered further by tax cuts (or rebates, whatever you prefer, they are in effect, tax cuts) which, according to the Wikipedia article, amount to a whopping 37% of the bill, essentially leaving us with about 45% for direct spending, and 18% for aid to the states, which as I've explained why in the past, is critical.

Unfortunately we skimped on some of the most important aspects of government stimuli. Education (paying more people to stay involved and prevent cutbacks), infrastructure (roads, bridges, schools), welfare (food stamps are one of the most, if not THE most, effective safety net program we have running, unemployment compensation is similarly effective) and so on. If you get down to the specific provisions, only 82 billion is spent on the safety net (leaving out medicare) and only 51 billion are spent on "core" infrastructure projects, things like bridges, roads, etc.

Some of THE most important and critical government stimulus amounts here to only 133 billion! If you look where the individual payments are going, less than 20 billion is going to food stamps! That's right, the most effective program for stimulus is receiving a paltry 19 billion dollar increase. That should have been, and could have been, easily doubled. Similarly, unemployment benefits, the second most effective on our list, could have been doubled, being originally placed in around 40 billion dollars and 25 dollar increases in benefits.

Infrastructure projects in the stimulus don't amount to much in the fine print either. Quite frankly, the entire plan for infrastructure spending should have been quadrupled. Less than 30 billion for highway and bridge construction, a pitiful 8 billion for railway construction and development, and more disappointing investments in infrastructure. Infrastructure projects are another important component on our list here, and have the potential, as was done during the New Deal under the Works Progress Administration (a model we should replicate) build an infrastructure for future prosperity, and improve public transportation to lessen the burden on individuals paying ever rising gas prices.

Other minor investments could have made a big difference in people's lives, such as greatly increasing the amount of money for free lunch programs at schools, which I also know from personal experience is a substantial drain on a family's resources when lacking it. Tax relief, while certain tax relief measures are stimulative, are not that effective because the general strength of a tax cut or a rebate isn't a long term benefit or isn't strong enough to make a big difference in an individuals like, but could, collectively, cause a great deal of harm to revenue coming into the federal government. I think Verily explained quite well in this thread why tax cuts aren't effective stimulus, so there's no need for me to explain that here. Even if, for the sake of argument, we were to conclude that tax relief is somewhat effective if you do it right, other measures are still far more effective on the dollar. The main problem with tax cuts though, is that it's not a targeted relief measure, so it usually just goes to paying off a minuscule portion of an individual's debt or to some sort of useless entertainment source.

In any case, I'm ending up rambling now. There are a great deal of solutions that could help and past models to look to for advice on what to replicate today, but sufficed to say, the stimulus could very well fall flat on it's face and do little to nothing because alot of the money was either A ) Insufficient for the targeted projects to make an impact, or B ) Not targeted at all, often in the form of some sort of tax relief that goes to a useless source. Tax relief measures should have been stripped from the stimulus almost entirely and direct spending on the safety net and infrastructure projects beefed up to include the vast majority of a nearly 1.5 trillion stimulus bill. It's a shame. I remain cautiously optimistic that it will have some sort of impact, but I'm not seeing it so far, and I fear we may has wasted a ton of money because we didn't go nearly as far as, say, the New Deal projects went.

[Marokai Backbeat]

I disagree. I think the problem was that most of the money hasn't even been spent yet. Really they should've done something like Bush's stimulus where they mailed out rebate checks (bigger ones obviously) combined with significant investments in infrastructure. I don't know if they did this, but they should encourage the states to spend on education, particularly college to reduce its price.

That would've been a horrible solution that ignored a great deal of other effective measures we could be taking. Just handing people money like that (and subsequently losing revenue) has never really worked as a catch-all solution, even if it did accompany a flurry infrastructure projects. Government programs are more effective on the dollar if you, largely, ignore taxes and focus more on goods and serves and narrow spending measures. Like food stamps.

As for encouraging states to spend. Please, no, that's a horrible idea. If anything we should be encouraging states to cut their spending (state spending combined has reached scary heights that at one point, started rivaling federal spending) on the promise of large aid from the federal government.

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I sincerely doubt it. The risk of that happening is actually higher if we do less over time rather than a massive, swift response reminiscent of the New Deal. The government estimates, if I recall correctly, there's a nearly 3 trillion dollar hole in the economy, and 800 billion dollars, comprised mostly of unhelpful spending and tax cuts, is not going to do it.

3. Government deficit spending and an overreliance on consumer and corporate debt within the US is widely seen, hell, is universally seen, as the major cause of this recession, caused as it is by a deflating credit bubble.

I agree with Opebo, this is nonsense. Individual and corporate debt were critical components in the economy's fall, but deficit spending wasn't. There's no correlation there. If any government spending was part of the problem, it would be the increasing reliance on state and local government and their increasing debt because of the lack of federal government support.

Also, I must say I'm depressed to see the usual suspects here, but not really responding to anything I've said the third time I've made a major economics post.