Will stimulus work fast enough?
Major job cuts announced this week add urgency to the bill as it nears a House vote.
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But the direct effect of the government’s dollars is only part of the legislation’s anticipated benefit, its boosters argue. At a time when banks have curtailed lending because of liquidity fears, and consumers have shut their wallets because of worries about layoffs, Washington needs to do something to demonstrate leadership and try to dispel the gloom.
“The biggest lift to the economy may come from the psychological boost the [stimulus] program likely will engender,” concluded a Wachovia Economics Group analysis released Jan. 23.
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According to Wachovia, the impact of the stimulus will take some time to filter through to the economy. Most of the bill’s infrastructure spending will not kick in until late this year or early 2010. The tax cuts may move a little faster, but are expected to have “only modest impact,” according to Wachovia.
The Congressional Budget Office, in a new report on the state of the US economy, agrees that the macroeconomic impacts of any stimulus program are very uncertain. Some economists are skeptical there will be any significant effects, while others expect very large ones, says the CBO.
“In part, that uncertainty reflects the fact that large fiscal stimulus is rarely attempted,” says the CBO study.
That said, the CBO projects that if the stimulus legislation passes, US gross domestic product (GDP) will be between 1.3 percent and 3.6 percent higher at the end of this year than it otherwise would have been.
The CBO anticipates a similar boost to GDP for 2010. The federal stimulus will produce between 800,000 and 2.1 million jobs this year and as many as 1.5 million additional jobs in 2010, its figures estimate.
“The stimulus will provide a significant boost to output and employment,” said new CBO director Douglas Elmendorf on Tuesday.
The CBO does estimate that money in the bill earmarked for existing programs may flow out relatively slowly, however. This is because the typical process of drafting plans, assessing contracts, and cutting checks can take time.
About 21 percent of the stimulus bill’s total spending will hit the economy this year. About 65 percent will have been spent within the first 18 months of the bill’s enactment, judges the CBO.
“The typical spending rate ... is slower than you might think,” said Mr. Elmendorf.
But that’s OK, the CBO director added, because the economy is expected to remain weak for some time, and continued government spending is thus appropriate.
The stimulus is only partly a short-term package, in any case, some economists note. Much of its spending is investment directed at long-term goals, such as greater renewable energy production and the computerization of medical records.
In the Obama package, “what we used to call stimulus ... has been merged into the broader concept of recovery and investment in future growth,” said Alice Rivlin, a Brookings Institution senior fellow and founding director of the CBO, at the House Budget Committee hearing.
But Ms. Rivlin urged that the investment portion of the bill be offset by corresponding budget cuts or revenue increases, in the name of fiscal responsibility.
This hodgepodge nature of the legislation is what irks GOP lawmakers. They complain that it contains extraneous items such as $600 million for new government cars and millions to refurbish the National Mall.