America can't shake its recession blues, even if the recession is officially over. The painfully slow recovery is typical in the wake of a financial crisis like the Wall Street collapse, economists say. Still, the hard times are so persistent that I have been feeling twinges of guilt about President Obama's stimulus package.
Many of Obama's ideas for a new economic foundation ended up in that package: expanded broadband coverage, competitive grants for innovative schools, computerized medical records, more science research, more investment in clean energy. I wanted all that, and the stimulus would miraculously make it possible. Using it as a vehicle, we could lay those foundations for growth in the second month of the Obama administration.
But lately I've been second-guessing that rush to turn campaign pledges into reality. The jobless rate has been so high for so long. Was it a mistake to shoehorn Obama's longer-range economic plans into a package intended to jump-start the economy? If that money had been applied to more traditional stimulus, with shorter-term impact, would more people have jobs? Would economists be less concerned about the potential for a double-dip recession?
After talking to five economists, I can give you the bottom line: Spending the money differently probably wouldn't have changed our circumstances much. But the economists took diverse paths to that conclusion, and they have varying opinions about where to go from here.
The $787 billion stimulus package, passed in February 2009, was about one-third tax cuts to people and businesses, one-third aid to states and localities, and one-third Obama's domestic agenda. Many economists and the nonpartisan Congressional Budget Office credit the stimulus with ending the recession last year. Some say the unemployment rate would have been up to 2 points higher without it. But the rate is still high – 9.5 percent in July and the August number, due Friday, may edge higher.
What might have been
A bigger stimulus would have been better, several economists told me. "If there was an obvious problem with it, it was sheer size," said Josh Bivens, an economist at the labor-backed Economic Policy Institute. As for the allocation of the money, he said that given the need for speed and tough negotiations for 60 votes in the Senate, "it was hard to be too disappointed in how it was structured."
Other economists offered wish lists for what might have been. David Madland, director of the American Worker Project at the liberal Center for American Progress, would have liked to see the administration "pour money" into Americorps, Teach for America and caregiver jobs. "The moment for that kind of major investment was right at the beginning," Madland said. "If they had pushed for much greater public service and direct care jobs, I feel pretty certain they would have gotten them."
Mark Zandi, chief economist at Moody's Analytics, said he would have added money for more temporary tax cuts, probably a payroll tax holiday. "We have it now but it's so small it's not very effective. That would have given us a bigger kick," said Zandi, who advised Republican presidential nominee John McCain in 2008.
Zandi called it a mistake to put infrastructure spending into the stimulus bill. "It's good policy and we can use the jobs, but it's not an effective way of getting money into the economy quickly," he said. Nor was spending on Obama priorities such as education and broadband "particularly helpful" in putting money into the economy fast, he told me. "You could make strong cases" that they are good long-term policy, he added, but they aren't effective stimulus and "they also confuse people with respect to what stimulus really is."
Douglas Holtz-Eakin, a former McCain adviser and former CBO director, said the country could have gotten the same economic results from a $300 billion to $400 billion stimulus centered on payroll tax cuts. He agreed that Obama's domestic policy agenda was inappropriate in the stimulus bill. Those programs have to do with "what we want to look like as a nation" down the road, he said, and their merits and costs should have been debated after the financial crisis passed.
Economist Rob Shapiro, a former Commerce undersecretary who advises Democrats, was an architect of the stimulus. He said the Obama campaign asked him what an innovation-driven stimulus package would look like and he outlined pretty much what we got. Does he regret the domestic-policy component? "Absolutely not," Shapiro told me. "Those are still going to be productive long-term investments."
He does regret, however, that the initial stimulus "wasted" money on small-business tax cuts that he says don't work in bad times, and did not include a loan program for homeowners facing foreclosure. The administration instead gave incentives to banks to rewrite mortgages, but Shapiro said very few homeowners were creditworthy enough to get the new loans. Some 1 million foreclosures are anticipated this year and housing prices are expected to continue to decline into 2011. By one estimate, 20 percent of homeowners are underwater – their homes are worth less than their mortgages.
Little change in impact
It's impossible to know whose version of the stimulus would have worked best, but the imperfect one that passed did get the economy growing again, however anemically. The CBO reached that conclusion, as did a Goldman, Sachs analysis and another by Zandi and Princeton economist Alan Blinder. The question is whether a different size or shape of stimulus would have provided a big enough kick to generate a self-sustaining recovery.
The answer is probably not. First of all, most of the stimulus money went out the door quickly, as it was supposed to. Some of the slower starters, such as home weatherization, have caught up. Now the worry is what will happen in the next few months when the stream of federal stimulus slows to a trickle and then stops.
Then there are the external and unforeseeable developments that would have affected a stimulus of any shape or size. This past spring alone, Zandi said, the European debt crisis knocked the wind out of consumer confidence; the Senate struggled over extending unemployment benefits (leaving up to 400,000 people without money to spend for several crucial weeks), and home sales dropped more steeply than expected following the expiration of a homebuyer tax credit.
The overriding problem, Bivens said, was that "the non-recovery act economy just continued to stagnate" over the life of the stimulus. Businesses did not hire enough and bankers didn't lend enough. State and local governments cut back spending and so did average Americans. As Shapiro put it, 70 percent of people own homes and home value has declined 20 to 25 percent. "Not only do they feel poor, they are poor," he said. "They are much less likely to spend."
The road ahead
With the Nov. 2 midterm elections in sight, economists don't expect any major developments. But their suggestions do include some steps under consideration by Congress, the Obama administration or both.
Shapiro and Zandi say stabilizing the housing market is crucial in the months ahead. Zandi recommended a program to help homeowners refinance their mortgages at cheaper rates. He said 10 million loans would qualify and people could save an average $100 a month, which they would then presumably spend. Housing secretary Shaun Donovan said last month that a refinancing program is planned, along with another one to help unemployed people stay in their homes.
Other steps the economists recommended were for the Senate to pass a stalled bill to give tax breaks to small business and make it easier for small business to get bank loans; and for lawmakers and Obama to resolve the fate of expiring Bush-era tax cuts.
Bivens said his no. 1 priority would be more aid to help state and local governments keep their workers. "We lost 48,000 jobs in July alone," he said. "That's an obvious hole that needs to be filled." He would also spend more on infrastructure projects and expand unemployment eligibility – for instance, to graduates who can't find jobs but don't have immediate work histories, as is now required. All of that will be "a really hard sell," given the political landscape, he said.
Congress just recently passed a state and local aid bill and has struggled to extend existing unemployment benefits, much less expanded ones. So Bivens is probably right about those being hard sells. But Obama did say this week that he is considering more spending on infrastructure, "redoubling" investment in clean energy and research and development, extending the Bush-era tax cuts for the middle class, and "further tax cuts to encourage businesses to put their capital to work creating jobs here in the United States."
Anything that happens now, given the political season and partisan stakes, will be "on the margin," as Zandi put it. But that's where a lot of workers and businesses are these days. Every drop of help will help as we await the payoff on Obama's investments in our future.