Did the Stimulus Work? Mehrdad Namazi Angela Agboli Ph.D Pad520 Apr 9, 2012

The Stimulus Analysis In this research I am trying to explain why the stimulus packages did not stimulate the economy that much, where the money is gone and also evaluate some alternatives. Congress has enacted two huge stimulus programs since the recent recession started in 2008. The first one was under President Bush for $152 billion and the second one was under President Obama totaled $863 billion. After more than three years since the recession emerged, still the unemployment is through the roof and the economic growth is sluggish. Why? In order to shed a light on this problem, first we have to know where the billions have gone and how they have been used. There are three kinds of Keynesian stimulus packages (1) the government gives money to people directly, in hopes that they would buy more stuffs and services. (2) The government directly buys goods and services (3) the government sends the check to state and local governments to spend it. In either one, the philosophy is that the increase in buying would result more activity and eventually will boost the economy. The 2008 stimulus was the first kind and the 2009 was almost a mix of all three. In 2008 the U.S Treasury started sending checks to households in the summer. It was supposed to put more money into the hands of people to buy additional goods and services and thereby stimulate production and jobs at the firms that produce those goods and services. It didn’t go anywhere. The consumer report in 2008 showed that consumption didn’t increase at all. Where has the money gone? Most of the money went to pay off some debt, some of it was saved and less than %25 was spent on goods and services. No surprise. Years ago, the well-known economist Milton Friedman (1966) explained that “most people do not spend more money when their revenues boost temporary, instead they either save it or pay off their past due debts”. In terms of spending, people consider permanent change in income rather than the provisional one. They would not change their spending patterns based on temporary increase. The American Recovery and Reinvestment Act (ARRA) of 2009 came in three phases: The effect of ARRA funds on government purchases was next to nothing. The federal government spent less than %10 of the whole Act. The main portion of the money went to households, state and local governments, which I explain below. The ARRA made the same mistake of 2008. This time the amount of money was less and was sent on a longer time than 2008. Again, there was no remarkable impact on spending. Most of the money went to pay off the past due or overcharged credit card bills. As a result it failed to jump production and employment. Based on the ARRA OF 2009, the federal government sent $170 billion to state and local governments in order to increase activity in the local economies. But, most of the stimulus funds went to cover their expenditures. In other words, the federal government received the money from the taxpayers and sent that money to state and local governments, which they used the cash to reduce borrowing from the public. Alternatives I would like to suggest four alternatives for the stimulus packages, which are able to deal with the problem: (1) Drilling in ANWR and offshore make around 20 thousand jobs in America. Based on the U.S Geological surveys, more than 10 billion barrels of crude oil and natural gas are sitting in the Arctic National Wildlife Refuge. If oil price is $100, then the total amount would be one trillion dollars. That is a big boost to the economy. (2) Congress should put cap on the government spending. The current spending is unconventional, especially when you don’t own the money and you have to borrow it from China. (3) Congress should act to privatize social security in order to give people the option to put their money in their own hands. They need to be confident that the government can’t spend their money. (4) The payroll tax falls mainly on the low-income workers. Although, the employer pays half of it, but studies show that he lowers workers compensations. Eliminating the payroll tax would increase incentives for workers and business owners and eventually create more jobs. Evaluation There have been more serious critiques of the $900 billion--plus ARRA--from more serious critics. The stimulus menu does include some head scratchers, like $246 million worth of tax breaks for movie producers to buy film and $1.4 billion for "rural waste-disposal programs." Principled conservatives worry that it's so big, it will institutionalize Big Government; principled liberals worry that it won't be big enough to revive a motionless economy. And a bipartisan chorus--including Clinton Administration budget chief Alice Rivlin and Reagan Administration economist Martin Feldstein--has argued that the stimulus package ought to be all about stimulus. Those people want to focus on fighting the recession, don't see renewable-energy subsidies, health-care technology and Head Start as the best ways to do that. "Many of them are worthy, but we can have that debate another day," argues conservative New York Times columnist David Brooks.
There are three questions the conferees should ask about every provision in the package: Will it stimulate the economy quickly? Will it create long-term fiscal obligations? Also, is it something we ought to do anyway? We need to strike the economy with a big move of federal dollars, and it's important that those dollars be spent in timely and manageable ways. But it's just as important that they be spent in ways that promote national priorities rather than undermine them. Fast is good, but this downturn is likely to last a while, no matter what the feds do. By these measures, some of the tax cuts need to go. Both chambers included a tax credit for first-time home buyers, which have its roots in an artificially inflated housing market; it wouldn't provide stimulus, and it wouldn't point the country in a new direction. The nonpartisan Tax Policy Center says the Senate's $70 billion patch to the alternative minimum tax is "neither timely nor targeted" and "makes no sense as economic stimulus." But the biggest component--a $145 billion payroll-tax cut--is both good stimulus, because it targets low- and moderate-income earners (who are less likely to save it), and good policy, because it aims to start rebuilding the middle class and help ordinary families who have been left behind during the eight- years of going-down economy. This crisis is an ideal opportunity for President Obama to start keeping his campaign promises: providing tax relief and health security to ordinary Americans, restoring our economic competitiveness and reducing our dependence on environmentally disastrous fossil fuels, which increases the power of our enemies. It's hard to imagine when he'll have a better opportunity. Nothing in the historical record suggests that when Congress has more time to deliberate--and more time to confer with special-interest lobbyists and local-interest political advisers--it enacts fair tax policies, sustainable energy policies, wise infrastructure policies, responsible fiscal policies or any other policies tainted by long-term thinking or national-interest considerations. If Obama wants to push 21st century change through Capitol Hill, he needs to use this emergency. Under Obama's leadership, the federal government has begun a series of steps to help alleviate the burden that the housing boom-then-bust has caused the American taxpayer and also the lenders. The home refinance stimulus package for mortgage refinancing and loan modification can do some amazing things for you if you are in need and qualify. There are two main components to the package. They are: 1) refinancing and 2) loan modification. With the refinancing plan, the house must be occupied as the primary residence by the person who took out the mortgage. If that condition is met, Fannie Mae or Freddie Mac refinance the loans of any home that is upside down - that is, the owner owes more than the house is worth. With the loan modification component, lenders and borrowers can agree on different terms for the mortgage. In order to qualify, again, the property must be your primary residence. Also, you must show economic hardship. Once you do that, the lender applies a formula and may lengthen the term of the mortgage up to forty years, reduce the interest percentage, and/or otherwise negotiate terms in order to get the mortgage payment down to no more than 31% of the household's gross monthly income. Assessing the Alternatives I would like to suggest two alternatives for the stimulus packages, which are able to deal with the problem: reducing government spending and revoking the payroll tax: 1-The ARRA of 2008 and 2009 failed to solve a problem, which was a real stimulus to the economy, and that is reducing government spending and boost the market with savings. Like anything else in Washington the argument about the stimulus is shaped between the Democrats who are willing to spend more on healthcare, social security, and green energy, and on the other side the Republicans who want to spend more on national security and defense. Nobody ponders that the real discussion should be about if the government must be spending or not in the first place. The government extracts a tremendous amount of money from public to finance its operations, mainly not productive, which means no wealth is created. Instead of getting the money from the economy, turning that around and putting it back into the economy, what about not extracting the fund from the economy by cutting back the government spending? 2- Revoking the payroll tax is another way to stimulate the economy. This Tax cut money is the fund that the economy didn’t have, because it was used up by the non-creative activities of the government. If we revoke the payroll tax forever, then people would consider that as a permanent income and start to spend it rather than save it. Thereby, it would stimulate the economy. We should also remember as Russell Roberts (2009), the chief editor of the Forbs Magazine, says “if we don’t match tax cuts with reduced spending, they are not really tax cuts”. Conclusion In my opinion, the best policies to help enhance the economy are those two policies that I have explained above, reducing government spending and revoking the payroll tax. Although, the stimulus package is useful in some areas like home financing and unemployment benefits, but we should not forget that as long as the government borrows money from the taxpayers and sends that to households and state and local governments, there would be no stimulate to the economy. As Don Drennon (2010), professor at UVA argues, “credit that is not supported by income is a prescription for an economic disaster. We have seen this happen, up-close”. There are some other policies in the stimulus package, which should be disregarded. For example the nuke industry which is already heavily subsidized and loan to new car buyers that of course makes the industry produce more cars but at the same time put people more and more in debt. All in all, I think the stimulus package needs some reforms to become more and more effective.

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. Pethokoukis, J. (2011). Did Obama Make It Worse? Commentary, 132(2), 42-45.