Responding to "Is the Stimulus Working?"

The Obama Administration's claim that the fiscal stimulus package is working, in the sense that it is providing the basis for a sustainable economic recovery, sits oddly with the facts. At the time that the fiscal stimulus was introduced earlier this year, the Administration expected that, with the fiscal stimulus, unemployment would decline from a peak of a little over 8 percent in the third quarter of 2009 to around 7 percent by mid-2010. Today, even President Obama acknowledges that unemployment is soon likely to be in double digits while most forecasters expect that unemployment will remain in the region of 10 percent through most of 2010.

More disturbing still is the fact that despite a sizeable boost to disposable income from tax cuts in the second quarter of 2009, household consumption actually declined by around 1 percent in that quarter. Since the stimulus' tax cuts were almost entirely concentrated in the second quarter of 2009, this has to throw into question whether we will get any meaningful rebound in household consumption in 2010, which would seem to be a necessary condition for a sustainable economic recovery. This is especially the case since one has to expect that the large gaps that have been allowed to develop in the labor market will exert downward pressure on household incomes that going forward will not be offset by further tax cuts. Further constraining consumption will be the attempts by households to repair balance sheets damaged by the US$12 trillion that has been destroyed in US household wealth.

The degree to which unusually large gaps have been allowed to open up in the US labor market highlights how ill-designed was the Obama fiscal stimulus package. If the purpose of the US$780 billion stimulus was indeed to jump-start the economy, one has to ask why only around one third of that package was concentrated in 2009 when the economy most needed support. One also has to ask how much economic sense it made for the fiscal stimulus to rely so heavily on the sort of temporary tax cuts that were seen not to have worked in 2008 and why the package was allowed to be so laden with pork that was sure to result in very little bang being obtained for the buck.

A particularly unfortunate consequence of the Obama Administration's botched 2009 fiscal stimulus package will be to complicate the prospect for any further fiscal stimulus in 2010. Sadly, the need for a second stimulus is all too likely in the event that the economy indeed experiences a double dip later in the year as consumer demand remains weak.

Desmond Lachman is a resident fellow at AEI.

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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