Lecture 16. EVALUATION OF THE STIMULUS

The ARRA, "Obama's Stimulus"
Obama’s stimulus was not Obama’s. It was
Republican Senator Olympia Snowe’s stimulus. She
determined its size and its contents. During the
filibuster, she ruled that 40% of the nearly $800B grant
should consist of tax cuts, of which almost all went to
fully employed workers who put it in the bank, where it
still sits. The effective size of the stimulus was less
than $500B when, to end the recession, it should have
been 10 times that amount.

ARRA spent about $0.8T during 3 years. With 40% of the
stimulus consisting of tax cuts, the amount of stimulus
used for infrastructure projects was about $0.5T.

Approximate data over 3 years:
2008: National Debt = $10T; GDP = $12T.
2011: National Debt = $15T; GDP = $15T.
Three-year GDP growth = 2011 GDP – 2008 GDP
                      = $15T - $12T
                      = $3T.

Average GDP Growth = $3T / 3 years
                   = $1T.

Since automatic stabilizers caused about 50% of GDP
growth, growth due to infrastructure spending
 = Average GDP Growth x 0.5
 = $0.5T

Since Average GDP Growth (due to infrastructure spending)
 = Multiplier x Stimulus / Years,

therefore manipulation of the variables yields:

Multiplier = Average GDP Growth x Years / Stimulus
           = $0.5T x 3 / $0.5T                                                             
           = 3.0
Result:
Since the CBO allows no more than 2.5 as the maximum
value of a multiplier for infrastructure projects, it
is obvious that, with respect to infrastructure
projects, the 2009 stimulus (ARRA) was at least as
effective as its size permitted.

It is unfortunate that much of the stimulus was wasted
in tax cuts. Since the federal government has no
registry of “shovel-ready” projects waiting only for
funding, any stimulus program would have management
problems, as did this one.  The Cabinet should have a
Secretary of Infrastructure with such a registry,
including updated procedures and costs.
Politics and Polemics
If you buy an air-conditioner for your bedroom window, it 
will cool the room quite well as the outdoor temperature 
climbs up to 95F or 100F. But if the temperature rises to 
110F and 120F, you don't take the air-conditioner back to 
the merchant and claim that it is defective. Being 
rational, you ask the merchant to recommend more cooling 
capacity.
 
All the politicians and journalists who say that "Obama's
Stimulus" failed or made the recession worse  are 
intelligent and well-educated. They understand and agree 
with the air-conditioner analogy. They know that the 
stimulus did what it was able to do and that more stimulus
was needed. They are simply liars and should be recognized
as such. That is their job.

The problem is political. Half of the voters may not be 
intelligent enough to understand the air-conditioner
analogy when it is explained to them. Many of the other
half can't see the analogy until it is given to them. Most
remarkable is the fact that few journalists and politicians
who favor the stimulus are trying to explain the analogy.
For some reason, Obama's advisors  repeatedly say that the
stimulus is working. They refuse to make stimulus their most 
important issue and demand more from Congress.
Hoover vs Obama
The September-October 2008 "Bush Meltdown" was a world-
wide financial collapse not seen since the Great 
Depression. It cannot be compared to any other post-WW II 
recession. It is instructive to look at two differnt ways 
of facing such a crisis.
 
The 1929 collapse began almost a year after President 
Hoover took office. His administration did not call for a 
TARP-like aid to the banks. Nor did it distribute 
unemployment benefits or any other relief. There was an 
insufficient program for construction of infrastructure. 
There was only an attempt to balance the budget and put up
tariff barriers to trade.

The result was a three-year decline of the GDP to one-
third of its peak value. When  FDR took office in 1933, 
the banking system was in total collapse and unemployment
stood at 25%. Farms and homes were being foreclosed at a 
high rate. Deflation had frozen the economy.
 
If President Obama had followed the same course with the 
same result, our GDP would now be under $5T. Instead, with 
ARRA and the bailout of the auto industry, our GDP now
approaches $15T - a $10T GDP improvement and a 16% 
unemployment rate improvement over the "laissez-faire", 
small government, Tea Party plan.

With a 30% tax burden, a $10T gain would yield a $3T 
revenue annually or $6T since the beginning of ARRA, which
cost less than $1T. Those who express doubt about the 
value of the 2009 ARRA programs are either fools or 
charlatans deceiving fools. 
 
The above analysis is based upon facts. Hoover's failure 
is a matter of record. So is ARRA's success. Those who 
deny our conclusion should stick to the available facts.
The Unemployment Rate
The purpose of a stimulus is to raise the GDP.  If raised 
sufficiently, the GDP has two distinct benefits:

Increased private spending, GDP growth, and reduced 
unemployment.

Increased tax revenue at all levels of government to 
decrease debt and the DR.

There is a false supposition that as the GDP grows during 
recovery from a recession, the unemployment rate will 
decline in direct negative correlation.  This does not 
happen in a linear manner because of the nature of 
employment.

When business income declines abruptly in a recession, 
managers cannot “stay out of the red” by 
reducing fixed costs or increasing prices.  The most 
efficient way to reduce costs is to lay off as many 
workers with fringe benefits as possible and hire as few
temporary workers without fringe benefits as possible.
 
Productivity and profits rise, but rehiring does not begin
until the crisis is almost over.  Therefore, the 
unemployment rate is a poor metric for the success of a 
stimulus.  The GDP is the only valid metric.  The Obama
administration made a serious PR mistake in failing to 
understand this fact.

Nevertheless, the CBO did estimate that possibly 4.8 
million equivalent full-time jobs were created, as we 
discuss below.
American Recovery and Reinvestment Act
As discussed in a previous lecture, the multiplier is 
controversial because, in a dynamic economy, it is 
difficult to isolate the effect of a stimulus from a 
multitude of other large factors. In the case of ARRA,
there are several such factors:

At a point shortly after inception of the stimulus 
spending in April, 2009, the following graph of monthly 
job loss claims displays an abrupt change in direction. 
Almost simultaneously, there was a robust rise of the Dow
Jones Index. This appeared to be due to ARRA tax benefits
restoring some spending and more business confidence.

                               !
                               !
                               !
                               !
                               !
Decline of jobloss claims immediately after
start of stimulus spending

During ARRA’s first year, about $500B was spent, 
almost $300B in tax benefits, mostly to fully employed 
workers who banked it. Only $50B was spent on 
infrastructure work which would have employed otherwise
unemployed workers.

At the same time that federal ARRA money was entering the 
economy, the 50 states (which either cannot legally have a
deficit or cannot borrow extensively) were cutting back on
spending. From one report, the net stimulus (federal plus 
states) was $47.6B, less than one-tenth of the ARRA 
disbursement. Instead of infrastructure, money transferred 
to the states was used to save the jobs of teachers and 
first responders. Gov. Perry of Texas used school repair 
funds to pay creditors, so that the money sits in a bank 
vault.

With a GDP output gap (Potential GDP - Actual GDP) of over
$4T, ARRA should have been at least five times larger and 
oriented toward infrastructure. Under the best of 
circumstances, the effect of a small stimulus will be 
difficult to measure among larger factors.

Naturally, certain government purchases result in more 
rapid spending than other purchases. Unfortunately, in a 
stimulus program, government purchases of goods and 
services are not designed only by administration 
economists trying to maximize stimulation of the economy,
but also by bargaining among members of Congress, 
including Republican Senator Olympia Snowe, mentioned 
above.  The results are not optimal.

With only one-tenth of ARRA invested in infrastructure, 
the effective multiplier is reduced. Since much 
infrastructure work is managed by the states, our nation
does not have a coherent infrastructure bank of "shovel-
ready" projects that are waiting only for funding to begin
work. Average-sized condominium buildings are better
organized than the USA.

To get the full benefit of stimulus, we need an 
Infrastructure Department at cabinet level with 
responsibility for developement, construction, and 
maintenance of all of the nation’s infrastructure 
ready to act at all times when resources are found to be 
idle.

The CBO evaluation of the stimulus
attributes a possible 4.5% GDP increase due to ARRA plus
a possible 4.8 million full-time equivalent job increase,
reducing the unemployment rate as much as 1.8%.
Essentially, the stimulus pays for itself while boosting
the economy.

Among other results of the improved economy:

GM is on track for eventual full recovery and loan 
repayment, although it may take years.

The banking system is on track to a full recovery under
better regulation.

The market has recovered from the Lehman Brothers shock 
and is under better regulation.
Proceed to:
Lecture 17. HONESTY vs DISHONESTY
Thanks for your interest.
  Marvin Sussman, retired engineer

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