Pros and Cons of Obama's Stimulus Package

Photo of Grand Canyon trail repair by volunteers aided by stimulus funds: John Moore/Getty Images.

President Obama's stimulus package, the American Recovery and Investment Act of 2009, was passed by Congress on February 13, 2009 and signed into law by the President four days later. No House Republicans and only three Senate Republicans voted for the bill.

Obama's $787 billion stimulus package is a consortium of thousands of federal tax reductions, and expenditures on infrastructure, education, health care, energy and other projects.

This stimulus package was to jumpstart the U.S. economy out of recession mainly by generating two to three million new jobs and replacing decreased consumer spending.

(See specific Pros and Cons at page two of this article.)

Stimulus Spending: Keynesian Economic Theory

The concept that an economy would be boosted if the government spent large sums of borrowed money was first set forth by John Maynard Keynes (1883-1946), a British economist.

Per Wikipedia, "In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas... that held that free markets would automatically provide full employment as long as workers were flexible in their wage demands.

... During the 1950s and 1960s, the success of Keynesian economics was so resounding that almost all capitalist governments adopted its policy recommendations."

The 1970s: Free-Market Economic Theory

Keynesian economics theory receded from public use with the advent of free-market thinking which postulated that the merket works optimally when without government inteference of any kind.

Led by U.S. economist Milton Friedman, 1976 Nobel Economics Prize recipient, free-market economics evolved into a political movement under President Ronald Reagan who famously declared, "Government is not the solution to our problems. Government is the problem."

2008 Failure of Free-Market Economics

Absence of adequate U.S. government monitoring of the economy is blamed by most parties for the 2008 U.S. and worldwide recession.

Keynesian economist Paul Krugman, 2008 Nobel Economics Prize recipient, wrote in November 2008: "The key to Keynes’s contribution was his realization that liquidity preference — the desire of individuals to hold liquid monetary assets — can lead to situations in which effective demand isn’t enough to employ all the economy’s resources."

In other words, per Krugman, human self-interest (i.e. greed)occasionally must be prodded by government to facilitate a healthy economy.

Latest Developments

In July 2009, many Democrats, including some presidential advisors, believe that $787 billion was too small to bolster the economy, as evidenced by the continuing U.S. economic slump.

Labor Secretary Hilda Solis admittedon July 8, 2009 about the economy, "Nobody is happy, and the president and I feel very strongly that we have to do everything we can to create jobs."

Dozens of respected economists, including Paul Krugman, told the White House that an effective stimulus must be at least $2 trillion, in order to replace the drop in consumer and governmental spending.

President Obama, however, aspired for "bipartisan support," so the White House compromised by adding Republican-urged tax breaks. And hundreds of billions in desperately-sought state aid and other programs were chopped from the final $787 billion stimulus package.

Unemployment Continues to Climb

Unemployment has continued to climb at an alarming rate, despite passage of the $787 billion economic stimulus package. Explains The Australian News: "... only six months ago Obama was telling Americans that unemployment, then at 7.2%, could be held to a peak of 8% this year if Congress passed his $US787 billion stimulus package.

"Congress duly obliged and unemployment has galloped ahead ever since. Most economists now believe the 10% mark will be reached before the year is out.

"... Obama's jobless prediction would be out of whack by more than four million jobs. As it stands now, he has miscalculated by about 2.6 million jobs."

Slow to Spend Stimulus Funds

The Obama administration has stumbled in rapidly circulating stimulus funds back into the economy. Per all reports, as of the end of June 2009, only about 7% of approved funds have spent.

Investment analyst Rutledge Capital observes, "In spite of all the talk we have seen about shovel ready projects, not much of the money has actually made its way into the economy yet..."

Economist Bruce Bartlett explained in The Daily Beast on July 8, 2009, "In a recent briefing, CBO director Doug Elmendorf estimated that only 24 percent of all the stimulus funds will have been spent by September 30.

" And 61 percent of that will go to low-impact income transfers; only 39 percent is for high-impact spending on highways, mass transit, energy efficiency, et al. By September 30, only 11 percent of all the funds allocated to such programs will be spent."

Background

President Obama's stimulus package of $787 billion includes:

Infrastructure - Total: $80.9 billion, including:

  • $51.2 billion for roads, bridges, railways, sewers, public transportation
  • $29.5 billion for government facilities and vehicle fleets
  • $15 billion for other projects, including $7.2 billion for public broadband, wireless Internet access, $750 million to the National Park Service, $650 million to the Forest Service, and $515 million for wildfire prevention.
Education- Total: $90.9 billion, including:
  • $44.5 billion to local school districts to prevent layoffs and cutbacks, with flexibility to use the funds for school modernization and repair
  • $15.6 billion to increase Pell Grants from $4,731 to $5,350
  • $13 billion for low-income public schoolchildren
  • $12.2 billion for IDEA special education
  • $300 million for increased teacher salaries
Health Care- Total: $147.7 billion, including:
  • $86.6 billion for Medicaid
  • $24.7 billion to provide a 65% subsidy of COBRA healthcare premiums for the unemployed
  • $19 billion for health information technology
  • $10 billion for health research, National Institutes of Health facilities
  • $1.3 billion for medical care for military members, families
  • $1 billion for the Veterans Health Administration
  • $2 billion for Community Health Centers
Energy- Total: $61.3 billion, including
  • $11 billion funding for an electric smart grid
  • $6.3 billion for state, local governments to invest in energy efficiencies
  • $6 billion for renewable energy, electric transmission technologies loan guarantees
  • $6 billion for the cleanup of radioactive waste from nuclear power plants
  • $5 billion for weatherizing modest-income homes
  • $4.5 billion to modernize the U.S. electrical grid
  • $2 billion for manufacture of advanced car battery systems
  • $400 million for electric vehicle technologies
Housing- Total: $12.7 billion, including:
  • $4 billion to HUD for repairing, modernizing public housing
  • $2.25 billion in tax credits for financing low-income housing construction
  • $2 billion to help communities purchase and repair foreclosed housing
  • $1.5 billion for rental assistance and housing relocation
Scientific Research - Total: $8.9 billion, including:
  • $3 billion to the National Science Foundation
  • $2 billion to the United States Department of Energy
  • $1.3 billion for university research facilities
  • $1 billion to NASA
SOURCE: American Recovery and Reinvestment Act of 2009 BY Wikipedia

Pros

"Pro's" for the Obama administration's $787 billion stimulus package can be summed up in one obvious statement:

If the stimulus works to shock the U.S. economy out of its steep 2008-2009 recession, and stems the unemployment rate, then it will be judged a success.

Economic historians persuasively argue that Keynesian-style spending was largely instrumental in pulling the U.S. out of the Great Depression, and in propelling growth of the U.S. and world economies in the 1950s and 1960s.

Meeting Urgent, Worthy Needs

Of course, liberals also fervently believe that many thousands of urgent and worthy needs... long ignored and exacerbated by the Bush administration... are met by spending initiatives included in Obama's stimulus package, including:

  • Long overdue repair and renewal of dangerously crumbling U.S. infrastructure, including highways and roads, the electric power grid, dams, bridges, levees, water mains and sewer systems, airports, and more;
  • Vital aid to beleaguered local school districts to prevent layoffs and cutbacks, plus $300 million for increased teacher salaries
  • Expansion of public transportation systems, building new high-speed passenger rail systems
  • $116 billion in payroll tax relief for individuals making less than $75,000 annually, and for couples jointly making less than $150,000.
  • $40 billion to extend unemployment benefits, and to increase benefits by $25 weekly
  • Increased medical coverage for military members and their families, and $1 billion for the Veteran's Administration, which suffered major cutbacks under President Bush
  • Food programs for low-income Americans, including $150 million to help refill food banks, $100 million for meals programs for seniors, and $100 million for free school lunch programs.

    Cons

    Critics of President Obama's stimulus package either believe that:

    • economic stimulus spending is doomed to fail, especially when it entails borrowing to obtain the funds to be spent (i.e. deficit spending); or
    • the "compromise" size or focus of the stimulus bill doomed the measure to be inadequate to pull the U.S. out of the 2008-2009 recession.
    Stimulus Spending Coupled with Borrowing Is Reckless

    A June 6, 2009 Louisville Courier-Journal editorial eloquently expresses this "con" perspective:

    "Lyndon is getting a new walking path between Whipps Mill Road and North Hurstbourne Lane... Lacking sufficient funds, the U.S. will borrow from China and other increasingly skeptical lenders to pay for luxuries like Lyndon's little walkway.

    "Our children and grandchildren will have to pay back the unimaginable debt with which we are saddling them. Of course, the fallout from their forebears' financial irresponsibility could first consume them in revolution, ruin or tyranny...

    "Obama and congressional Democrats are making an already awful situation exponentially worse... Borrowing from foreigners to build paths in Lyndon is not only bad policy, but ought to also be unconstitutional."

    Stimulus Package Was Inadequate or Wrongly Focused

    Lamented liberal economist Paul Krugman, "Even if the original Obama plan — around $800 billion in stimulus, with a substantial fraction of that total given over to ineffective tax cuts — had been enacted, it wouldn't have been enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years.

    "Yet the centrists did their best to make the plan weaker and worse."

    "One of the best features of the original plan was aid to cash-strapped state governments, which would have provided a quick boost to the economy while preserving essential services. But the centrists insisted on a $40 billion cut in that spending."

    Moderate Republican David Brooks opined "... they've created a sprawling, undisciplined smorgasbord, which has spun off a series of unintended consequences.

    "First, by trying to do everything all it once, the bill does nothing well. The money spent on long-term domestic programs means there may not be enough to jolt the economy now... The money spent on stimulus, meanwhile, means there’s not enough to truly reform domestic programs like health technology, schools and infrastructure. The measure mostly pumps more money into old arrangements."

    Where It Stands

    "Congressional Republicans tore into the Obama administration over the economic stimulus plan,... arguing that the White House is mishandling the distribution of the money while overstating the ability of the package to create jobs," reported CNN on July 8, 2009 about a "contentious hearing before the House Oversight and Government Reform Committee."

    CNN continued, "The White House Office of Management and Budget defended the plan, arguing that every federal dollar spent has, by definition, helped to ease the pain of the worst economic crisis since the Great Depression.

    A Second Stimulus Package?

    Obama economic advisor Laura Tyson, former Director of the National Economic Council, said in a July 2009 speech that "the U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was 'a bit too small'" per Bloomberg.com.

    In contrast, economist Bruce Bartlett, a conservative Obama supporter, pens in an article entitled Obama's Clueless Liberal Critics, that "the argument for more stimulus implicitly assumes that the bulk of stimulus funds have been paid out and done their work. However, the data show that very little of the stimulus has actually been spent."

    Bartlett argues that stimulus critics are reacting impatiently, and notes that economist Christina "Romer, who now chairs the Council of Economic Advisers, says the stimulus is working just as planned and that no additional stimulus is needed."

    Would Congress Pass a Second Stimulus bill?

    The burning, relevant question is: Is it politically possible for President Obama to push Congress into passing a second economic stimulus package in 2009 or 2010?

    The first stimulus package passed on a House vote of 244-188, with all Republicans and eleven Democrats voting NO.

    The bill squeezed by on a filibuster-proof 61-36 Senate vote, but only after making significant compromises to attract three Republican YES votes. All Senate Democrats voted for the bill, except those absent due to illness.

    But with public confidence falling in Obama's leadership in mid-2009 on economic matters, and with the first stimulus bill failing to quell unemployment, moderate Democrats can't be relied on to solidly support additional stimulus legislation.

    Would Congress pass a second stimulus package in 2009 or 2010?

    The jury is out, but the verdict, in summer 2009, doesn't look good for the Obama administration.