Obama Blew it!

Apr 16, 2013 by

How the federal government flushed away the $833 billion stimulus

If you want to see where a little bit of your $833 billion stimulus went, head south from St. Louis on Interstate 44 until you reach the Mark Twain National Forest. On March 13, 2009, less than a month after President Barack Obama signed the American Recovery and Reinvestment Act (ARRA) into law, the federal government awarded $462,912.30 to a Spokane, Washington, construction firm called CXT Incorporated to build and install 22 “precast concrete toilets” in the park.

These bunker-style commodes did not add to the number of bathrooms in the forest; they replaced existing toilets that didn’t meet Forest Service condition standards or accessibility requirements. And they were not just isolated outhouses. New Mexico got $2.8 million to spend on new toilets in its national parks. Another $42 million went to upgrading toilets and other sanitation facilities in Alaska.

The stimulus wasn’t sold as a plan to build bathrooms. “We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children, and building wind farms and solar panels, fuel-efficient cars and the alternative energy technologies that can free us from our dependence on foreign oil and keep our economy competitive in the years ahead,” President-elect Obama said in a November 2008 address. The stimulus, Obama vowed, would “put people back to work and get our economy moving again,” creating between 2 million and 2.5 million jobs. Instead, the economy followed the money right down the drain.

What went wrong? Plenty. The stimulus was rushed to passage based on economic assumptions that remain hotly contested. Its implementation was marred by politics, logistics, and red tape. And the aid it directed toward the country’s least well off may have undermined the very recovery it was designed to hasten. This is what happens when politicians insist that something big must be done, even if they’re not sure what that something should be.

The Rush to Stimulus

The march to the stimulus began on the 2008 presidential campaign trail. “Instead of doing nothing for out-of-work Americans,” Obama said in April 2008, “we need a second stimulus that extends unemployment insurance and helps communities that have been hit hard by this recession.” Obama framed his call for stimulus as a follow-up to the $152 billion tax rebate George W. Bush signed into law in February 2008. That plan cut most Americans a $600 check.

Candidate Obama called for something more proactive: Washington-directed, socially conscious spending on education, alternative energy, and transit projects would replace the usual Republican prescription of tax breaks only, allowing government to “grow the middle class by investing in millions of new green jobs and rebuilding our crumbling infrastructure.” It was more a  grab bag of longstanding liberal wish list items than a focused spending injection tied to a specific economic theory.

Soon after Obama won the presidential election in November 2008, his advisers spent a day walking him through the ugly economic realities of the recession. One of the presentations came from Christina Romer, soon to be the head of the president’s Council of Economic Advisers. As Michael Grabell reports in his book Money Well Spent?: The Truth Behind the Trillion Dollar Stimulus, the Biggest Economic Recovery Plan in History, which this article draws upon substantially, Romer warned the president-elect of a chilling possibility: that America’s economy would plateau but struggle through a decade of weak growth, much like Japan. It was a warning that would prove unintentionally prophetic.

Obama indicated he was willing to be flexible regarding the details of a stimulus plan, but he made one thing clear. “What is not negotiable,” he said, “is the need for immediate action.” Romer took the lead on designing the plan.

Her recommendations had goals similar to those of Bush’s tax rebates: Boost output by injecting money into the economy to stimulate consumer demand, and therefore jobs and growth. The hope was to create a “multiplier effect,” in which each dollar of stimulus creates more than one dollar of economic activity through a virtuous feedback loop.

But in addition to having the government rather than consumers spend most of the money, Romer’s plan differed strongly from Bush’s in one key respect: scale. It was several times larger than any stimulus proposed in 2008 by any prominent politician. On the campaign trail, Obama’s Democratic rival Hillary Clinton had proposed a $30 billion stimulus. Then-House Speaker Nancy Pelosi (R-Calif.) put together a $150 billion proposal. Some economists pegged the necessary amount closer to $300 billion, an estimate of how much it would take to get the economy back to its full potential—a figure referred to as the “output gap.”

But Romer estimated that the amount needed to fill the gap was well north of $1 trillion. She pushed for a multiyear plan that would include a combination of infrastructure spending, increased funding for transfers such as Medicaid and unemployment benefits, bailout money for budget-hammered state governments, and tax breaks that would trickle out paycheck by paycheck over several years.

Political considerations eventually knocked the price tag down to about $787 billion (a figure later revised upward to $833 billion), but it was still the largest and most ambitious recovery plan in the history of the world, putting the country’s already extended finances much more deeply in the red. Yet not only did the president’s economists not know if it would work; they might never be able to judge whether it had.

That didn’t stop them from predicting success. In January 2009, Romer and Jared Bernstein, who would go on to be Vice President Joseph Biden’s top economic adviser, projected that without the stimulus unemployment would hit 9 percent and stay there for nearly a year, but that with a recovery plan unemployment would peak at 8 percent and drop below 7 percent within a year. Of the new jobs created, 90 percent would be in the private sector. Those projections were quickly revealed as fantastically optimistic: The unemployment rate would climb to 10 percent in October 2009 and hover near that level for another year, while millions of people simply stopped looking for work.

Stimulus supporters still deem ARRA a success in forestalling another depression. But you can’t claim success unless you can measure it. And when it comes to massive economic interventions like the stimulus, that’s exceedingly difficult to do.

via Down the Drain – Reason.com.

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