Is the Stimulus a Failure?

Five months have passed since President Obama signed the $787 billion stimulus bill, and the economy remains mired in the doldrums. Any hopeful signs (what economists like to call green shoots) are offset by continuing job losses -- 433,000 last month, enough to push the jobless rate to 9.5%. Opinion polls show the public losing confidence in the stimulus and in Obama, and Republicans are saying, I told you so.

Republicans are obviously scoring points making a case that the moves of the Democratic president and Democratic Congress have failed to fix the economic mess and may be making it worse. It is clearly Obama's economy now, and polls show the public is especially concerned about the deficit, which hit $1.1 trillion in the first nine months of this fiscal year.

The GOP attacks represent a tried and true tactic, one that's entirely legitimate (at least in the sense that all is fair in love, war and politics). And Democrats made it easy by making promises in February that were never very realistic.

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Of more interest to the country, however, is the fundamental question of whether the stimulus is or will work and whether anything should be done about it. This is not an academic question. Democrats are hinting at the need for a second stimulus and Republicans are talking about rolling back the one passed in February.

To date, about $156 billion in new spending has been committed, but only a fraction of that amount -- $56 billion has actually been distributed to state governments, jobless workers and others. Another $43 billion has been left in the hands of taxpayers who saw withholding rates adjusted to that effect.

This is largely what was intended. The stimulus is a two-year bill containing about $499 billion in spending and $288 billion in tax cuts. While the hope was to get money for infrastructure out the door quickly, much of the other spending and the tax cuts were intentionally designed to dribble out slowly. The feeling was that the recession would last awhile and the recovery would be weak, so the spending would be helpful over a long term horizon.

The stimulus has had a positive impact in some areas, but the evidence is anecdotal and its effect on the overall economy is hard to assess. For example, the $8,000 tax credit for first-time home buyers, which was added almost at the last minute, seems to be giving the housing market a much needed helping hand. And money provided to local governments has helped keep many summer job programs for young people alive.

But with the unemployment rate headed north of 10% early next year, many Americans are feeling more anxious than ever. It certainly didn't help that the Obama administration, in an effort to win support for the stimulus, promised to create or save up to 3 million jobs and keep unemployment at 8%. But you can feel some sympathy for the president when you remember he cut back the size of the stimulus and added a lot of slow-acting tax cuts to appease Republicans and win at least a couple of their votes, only to be blamed now by some economists who say the bill wasn't big enough and is being rolled out too slowly.

The fact of the matter is that we are unlikely to ever be able to determine whether the stimulus was effective because we'll never know how the economy would have fared without it. There is just no way to tell for sure. That leaves the verdict in the court of public opinion, and both sides will keep arguing their case in an effort to sway voters. Recent polls show Republicans gaining, with Obama's overall job approval rating dropping to 57%, and only 44% approving of the way he's handling the economy. Over the next several months, the political debate will only grow more fierce, with both sides believing it is key to the 2010 congressional elections.