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Why the Obama Stimulus Will Fail, Chapter 217

Obama's OMB Director Fingers the Problem

Take a look at this chart:

secondstimulus

According to the Congressional Budget Office, this is the timetable for spending the $61 billion approved by House Democrats in their stimulus package, which was pushed through the House in September. If you focus on Title 1, you see that of the $34.874 billion in new infrastructure spending included in the bill, only $9.855 billion could be spent in 2009. That’s 28 percent of the total.

According to Democrats, this legislation centered on only the projects that were the most ‘ready to go.’ Nancy Pelosi said:

In order to have an immediate effect on the economy, investments are made in infrastructure projects that can start fast, meet existing needs, and create jobs. These projects provide short term benefit by putting people to work and buying goods

So for the bill they passed in September, Democrats picked about $35 billion in low-hanging fruit — the projects that were as ‘ready-to-go’ as they could be. And even so, less than 30 percent of the funds could be paid out in the first year. While it’s unclear so far exactly how much infrastructure spending will be included in Obama’s stimulus package, it will clearly run into the hundreds of billions. As Democrats broaden their definition of projects that are ‘ready to go,’ they will by definition slow the rate at which funds are spent. When President Obama signs his stimulus bill into law, it will already be 5 months further into the recession than when CBO reported on the last Democratic bill — and thus 5 months along toward being wasteful and counterproductive spending. He will also be signing a much larger bill, with a much smaller percentage of ‘front-loaded’ spending.

Now, why is this important? Because even if you accept the argument that government spending is a good way to stimulate growth, it still has to be delivered at the right time. And even for a Keynsian economist, that’s the rub. One Democrat budget expert who understands the problem very well is former CBO chief Peter Orszag:

The timing of fiscal stimulus is critical. If the policies do not generate additional spending when the economy is in a phase of very slow growth or a recession, they will provide little help to the economy when it is needed. (Over the long term, the key constraint to economic growth is the rate at which the capacity of firms to produce goods and services is expanded—not aggregate demand.) Poorly timed policies may do harm by aggravating inflationary pressures and needlessly increasing federal debt if they stimulate the economy after it has already started to recover.

For numerous reasons, discretionary fiscal stimulus may not be properly timed, and it has often been mistimed in the past. The failure to forecast a coming slowdown or contraction in economic activity is generally thought to be the most important reason for poor timing and is referred to as a “recognition lag.” Additional problems can arise if the policy change that is adopted does not affect spending immediately or if there are lags in enacting or implementing policies.

Orszag has moved on from the CBO of course; he’s now Obama’s budget director. And despite his ability to diagnose the problem quite clearly just a year ago, the Obama administration is planning to sign a ‘stimulus’ bill whose primary component will at best be irrelevant to short-term growth, while adding significantly to the deficit.

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