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Stay the Stimulus Course

By Alan S. Blinder
Tuesday, August 11, 2009

Apparently not bothered by facts, some congressional Republicans are already claiming that President Obama's $787 billion stimulus package has failed and are even advocating that some of the remaining scheduled steps in the legislation be canceled.

In medicine, that would be malpractice. In politics, it's demagoguery. In reality, we need to stay the course.

The course now includes "Cash for Clunkers," the recently renewed federal subsidy program that encourages people to scrap their old cars and buy new, more fuel-efficient vehicles -- an idea that I advocated more than a year ago. At first blush, "clunkers" seems to be the quintessentially successful stimulus program: fast-acting and apparently offering a huge bang for the buck. This sleek sports car of a policy seems to stand in stark contrast to the president's clunky stimulus package, which is sputtering along.

But that's not quite right.

First, the images of car dealerships and crushed vehicles that have been blanketing newspaper pages and TV screens do not depict real stimulus. What they show is the prelude to stimulus -- old cars being scrapped and new cars being sold out of inventory. The stimulus to employment comes only when automakers respond to the higher sales and depleted inventories by boosting production. Everything takes time, and you won't see the new cars manufactured on TV.

So it is with most of the stimulus measures in the American Recovery and Reinvestment Act. The effects are there, but they will take a while to be felt, and they don't usually lend themselves to photo-ops. One good example is fiscal relief for state and local governments. It is not just in California that state and local governments are cutting back on all sorts of public services. Just over 20 percent of the $174 billion in federal funds appropriated for the states has been spent, and that cash infusion is limiting -- though not eliminating -- the cutbacks. The other 80 percent is on the way. But we won't see photos of public servants not being fired.

Critics claim that the stimulus program is running way behind schedule. Is it? Well, no. While the administration certainly made an overly optimistic economic forecast in February, the stimulus bill, at about 5 percent of gross domestic product spread over more than two years, was never going to cure the patient quickly, or on its own. Rather, it was designed to cushion the fall -- as it has.

The simple truth is that even the voracious U.S. government cannot spend $787 billion quickly. Spending from the stimulus legislation is running pretty much in line with what the Congressional Budget Office projected when the bill was passed -- which was 24 percent in fiscal 2009 (which ends Sept. 30) and an additional 50 percent in fiscal 2010, or 74 percent in about 18 months.

These are still early days for a bill Congress passed only six months ago, but the stimulus has already had a notable impact. The average estimate of three private forecasting firms is that the stimulus added about 2 1/2 percentage points to the annualized GDP growth rate in the second quarter. (If that sounds too high, remember it means adding only about 0.6 percent to the level of GDP.) The consensus of the three firms is that the impact on third-quarter growth will be a bit larger. As they say on the farm, that ain't hay.

But let's put those numbers into perspective. The advance estimate of second-quarter GDP growth came in at negative 1 percent. That's a poor performance; we went downhill rather than uphill. But it marked a huge improvement over the disastrous first quarter (negative 6.4 percent growth) and the two quarters before that. Using the aforementioned estimates, fiscal stimulus accounted for about half of the improvement from the first quarter to the second.

We are now in the third quarter, when the importance of the stimulus is likely to be even greater. In fact, its estimated growth impact (about 3 percentage points) actually exceeds the consensus forecast for third-quarter growth -- meaning that, according to current expert opinion, the stimulus will account for more than 100 percent of GDP growth this quarter.

Cartoonists may scoff at lights at the ends of tunnels, but our economy does, finally, seem to be growing again. The Recovery Act is by no means the only reason. Chairman Ben Bernanke and his colleagues at the Federal Reserve have certainly done a great deal, and the economy's self-curative powers also have helped. But what six months ago looked like an economy plunging into an abyss is now an economy on the mend. And the stimulus deserves some of the credit.

The writer, a former vice chairman of the Federal Reserve Board, is a professor of economics and public affairs at Princeton University.

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