Viewpoint

Stimulus: The Good News, and the Bad


New figures released by the White House on Oct. 30 add to evidence that the federal economic stimulus package is working to create and save jobs. Unfortunately, that's not altogether good news.

Why not? Think about it: If the stimulus is working, and the job market is extremely weak in spite of it, what will happen when the stimulus begins to fade sometime next year? Many economists are increasingly worried that the U.S. recovery will be agonizingly gradual, especially if it doesn't get another jolt of help. "I think it makes sense to look at more aid from the federal government, whether they call it stimulus or not," says Gus Faucher, director of macroeconomics at Moody's Economy.com, a West Chester (Pa.) consultant.

The White House report said $160 billion worth of the stimulus funds spent so far—out of the $787 billion total in the stimulus plan—have "created or saved 640,329 direct jobs" through the end of September. The almost comically precise number is based on reports by recipients of stimulus funds. The White House says the actual number of jobs saved or created is greater than that—probably more than 1 million—because the $160 billion measured represented only about half the money spent so far, and because people who are hired with stimulus funds tend to spend their pay and create secondary employment.

To back up its claims, the White House also released a white paper showing that independent economists estimate that the stimulus package has created or saved anywhere from 620,000 to 1.5 million jobs through the third quarter. Those numbers figure in all of the stimulus spending to date as well as secondary employment, which is fair.

a drop in the bucketA million or so jobs sounds good until you remember that U.S. employment has fallen by more than 7 million since the recession began in December 2007. Economists estimate that the economy lost roughly 200,000 more jobs in October alone.

On Oct. 29 news reports greeted the 3.5% estimated growth rate of the economy in the third quarter as evidence that the deep recession was finally over. However, much of that growth came from stimulus programs such as cash for clunkers and the tax credit for first-time home buyers. Without those, President Obama's chief economic adviser, Christina Romer, said on Oct. 29: "Real GDP would have risen little, if at all."

The Obama Administration and Congress don't appear to have the stomach for another major stimulus act, in part because the ballooning federal deficit will mean higher taxes in the future and possibly higher interest rates if bond investors get nervous.

Still, many economists say something will have to be done to buoy the U.S. economy as the stimulus fades in the second half of 2010. In Oct. 30 interviews, Faucher of Moody's Economy.com and Nigel Gault, chief U.S. economist of IHS Global Insight (IHS), both mentioned further extensions of unemployment benefits and aid to state and local governments. Because most state and local governments are required by law to balance their budgets each year, their declining tax revenues require draconian spending cuts and layoffs, which become their own drag on U.S. economic growth, the economists said.

If the U.S. piles on too much debt from new spending programs, of course, that's a big problem in the long run. But in the short run, says Faucher, "it's more important to make sure the economy gets going again. Once we have a self-sustaining economy under way, then we can worry about reducing the deficit."
Coy_190
Coy is Bloomberg Businessweek's economics editor. His Twitter handle is @petercoy.

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