Dallas Fed says fiscal stimulus is a quick fix, not a permanent solution
The fiscal stimulus plan, formally known as the American Recovery and Reinvestment Act, signed into law by President Obama in February 2009 has succeeded in everything it planned to do, in theory. It designated the majority of funding toward the people who need it the most and at the most crucial time they need it. But Jason Saving, senior economist at the Federal Reserve Bank of Dallas, doubts the plan is showing the anticipated results in practice. He said the bill, which was expected to raise GDP by one to three percentage points as well as lower the unemployment rate by half a percentage point, is relying on the 'would-have'/'could-have'/'should-haves' for an actual degree of success. "Simply put," Saving said in his report released this month, "there's no way to know how badly the economy would have performed in the absence of fiscal stimulus and no way to prove how many jobs would have existed without stimulus." Traditional economic stimulus encourages saving and investment. This enables the economy to grow at a faster rate over the longer term and provides citizens with higher living standards. Savings said the most recent stimulus package the government is backing, emphasizes the need for consumption and spending and focuses primarily on stimulating the economy in the short-term. Saving proposes an analogy: suppose everyone were given economic "seed corn" and offered the choice to either eat it or plant it. Eating the seed provides an immediate benefit through temporary satisfaction, but reduces the size of future harvests. Planting the seed means temporary discomfort, but better future harvest. Saving says both are necessary, "but tipping policy toward eating over planting undermines future growth." The government is accomplishing this, he says, by allocating stimulus funds for, the people who need them, yes, but also the people who are most likely to spend them -- the people who will eat the seed if you will. Funds from the fiscal stimulus can be divided in to three categories: direct spending (which goes directly to citizen benefit plans such as Medicaid or unemployment programs), discretionary spending (which goes to federal and state agencies for projects such as roads and schools) and tax cuts (money that goes primarily to Making Work Pay credit of $800 per couple once a year). As noted by the chart, the majority of these funds are allotted to direct spending. "Research suggests that unemployment insurance extensions and other programs that target individuals who have high marginal propensities to consume provide the greatest fiscal bang for the buck, creating considerably more short-run economic activity than they displace," wrote Saving. He breaks down the funds by category (see chart below), stating that the programs or subdivisions that receive the least amount of funding provide little short-term boost, but account for long-term benefits. Even with the stimulus package, the unemployment rate soared above economic predictions (around 8%). All-in-all Saving says, while the fiscal stimulus provided a short-term economic boost, he's not convinced it will last, especially with the federal deficit currently at $1.4 trillion and expected to remain above $500 billion annually for the next decade. "While the overall weight of the evidence suggests the stimulus plan has provided a short-term boost, it’s unclear exactly how large this boost has been," concluded Saving. "What is clear is that stimulus funds have exacerbated near-term fiscal imbalances." Write to Christine Ricciardi.