Shmoop Politics Guide: Obama’s Stimulus Package

The Question: Was the Obama stimulus package a failure?

At Issue:

When Barack Obama became president in January 2009, he inherited a great big economic mess.  The economy was already stuck in the worst recession anybody could remember – the worst since the Great Depression, in fact – and the country’s financial system had recently been teetering on the edge of collapse.  For years, the country had been borrowing more money than it could afford to pay back, and using most of it to build houses it didn’t need at prices that couldn’t keep rising forever.  When that bubble burst, all hell broke loose.

Even before Obama won his election in 2008, his predecessor George W. Bush had begun taking desperate emergency measures to bail out failing banks and prop up a failing economy.  But Bush was deeply unpopular and a lame duck in office; the new president would have to make the tough calls on how to get the American economy moving forward again.

The centerpiece of Obama’s approach, passed by Congress in February 2009, was the American Recovery and Reinvestment Act – the so-called “stimulus package.”  At a cost of $787 billion, the stimulus offered a package of tax cuts and new government spending that was supposed to kick-start economic growth.  Now, more than 18 months later, we know that total collapse into Great Depression 2.0 never happened… but the economy today isn’t exactly smelling like roses, either.  Unemployment remains sky-high, growth is painfully slow, and more and more people are worried about the future costs of paying for a stimulus that doesn’t seem to have been as stimulating as many hoped.

So… did Obama’s stimulus fail?

Why You Care:

Have a job?  Want one?  Need one?  Then you care, because the American economy right now is a mess; work is harder to find today that it has been at any time since before your parents were born.  If the stimulus is part of the solution, you need for it to start working; if the stimulus is part of the problem, you need it to go away.  And you need for that to happen ASAP.

Meanwhile… are you planning to still be around in ten years?  Twenty?  Fifty?  However bad things are today, we have to worry about tomorrow too.  The government – like way too many private citizens – is deeeeeeeeeep in debt, and the stimulus is making that problem worse, not better.  Somebody has to pay the bills someday… and somebody is you.  So is this stimulus a wise investment in a better future, or a big pointless boondoggle?  You better care because you’re paying for it.

Context:

The idea to use government spending as economic stimulus in hard times definitely wasn’t something that started with Barack Obama.  Back in the 1930s, it was proposed by a very influential British economist named John Maynard Keynes.

Keynes believed that the root cause of the Great Depression was the failure of aggregate demand – that’s just a semi-fancy economists’ term for all the stuff all the people in society want to buy at any given time.  A failure of aggregate demand happens when all the people together don’t want to buy as much stuff as the economy is able to produce.

In Keynes’ view, that happened during the Great Depression due to the “paradox of thrift” – when the economy went in the tank after the Great Crash of 1929, people (quite sensibly) tried to save as much money as they could so they wouldn’t end up homeless if they lost their jobs.  But then (in Keynes’ view, anyway) the paradox kicked in: as millions and millions of people saved rather than spent, companies couldn’t find anyone who wanted to buy their products.  So they (quite sensibly) cut back production and laid off their workers.  When thousands of companies did this, even more people lost their jobs… which made them want to save even more.  Which meant more cutbacks at more companies.  And so on and so on, until everyone was living in a Steinbeck novel.

In such a bad recession or depression, Keynes reasoned, individual citizens and private companies were all (quite sensibly) cutting back.  But what the economy needed was for someone to start spending more, to start buying stuff so that companies would want to increase production, making them hire workers who could earn paychecks to spend on more stuff.  Keynes’ solution: the government should, as an emergency short-term measure, go into debt to spend a whole bunch of money to stimulate the economy.

So, long story short (or short-ish, at least): Keynesian stimulus is an old idea.

Before we fast-forward back to Barack Obama, though, it’s important to mention that Keynesian stimulus is also a controversial idea.  It was controversial in the 1930s, became widely accepted for a generation after that, but then (after the economy started sucking again in the 1970s) became pretty unpopular among economists in more recent years.  Milton Friedman, who believed in free markets and monetary policy rather than Keynesian fiscal policy as the best tool for encouraging economic growth, became the world’s most influential economist.  But then Friedman’s model proved unable to solve the economic and financial crisis of 2007-09… setting the stage for Obama to begin his presidency with the stimulus package.

Obama’s stimulus was born out of two overlapping political controversies:

First: should there be a Keynesian stimulus program at all?  Most economists (and most of the general public) supported the idea of stimulus at the time, but a significant minority insisted that the free market should be left to sort out its own problems without government interference, and that the stimulus would likely cause more problems than it would solve.

Second: if there should be a Keynesian stimulus program, how big should it be, and what should its funds be spent on?  How much stimulus was really needed?  Half a trillion dollars? A trillion? Two trillion? And should that enormous amount of money be spent on new infrastructure projects – bridges, railroads, freeways and the like?  Or on wages and benefits to government workers – teachers, firefighters, policemen, the lovely clerks at the DMV, and so on – who otherwise might lose their jobs?  Or perhaps on extended benefits for people who lost their jobs?  Or on tax cuts?

The stimulus bill that passed Congress in February 2009, after the usual political haggling, cost $787 billion and included a mix of all these things.  So now, with the benefit of (a little) hindsight, we have to answer the Goldilocks Question:  Was it too big?  Too small?  Just right?

And, perhaps more important for 2010 and beyond:  since the economy still stinks, do we now need to double-down on more stimulus?  Or change to totally different approach?  Or just ride it out with what we’ve got?  That may be the key question to be answered in the 2010 midterm congressional elections.

Key Arguments:

So did the Obama Administration get it right with the 2009 stimulus plan?  Surprisingly enough, the Obama Administration says yes.  But the plan has drawn sharp criticism from two opposing sides.  From the right, conservatives say that it was a bad idea in the first place and failed to solve the recession.  And from the left, liberals argue that a stimulus was needed, but the particular stimulus Congress passed in 2009 was too small to fully address the size of the recession, and that many of its specific provisions were poorly targeted.

The Stimulus Worked:

  • Crisis Averted: The economy was in freefall in early 2009.  The stimulus succeeded in stopping the fall, preventing this recession from blowing up into Great Depression 2.0.  Things still aren’t great now, but they would have been much worse without the stimulus.
  • Bipartisanship: For political reasons, few Republicans ended up voting for the stimulus, but that doesn’t mean that it wasn’t the product of a genuine effort on Obama’s part to craft a compromise.  The overall stimulus was smaller than it might have been, and much more of it was composed of income tax cuts than Democrats wanted – these were both efforts to incorporate Republican ideas in the plan.

The Stimulus Was a Bad Idea:

  • Free Enterprise: The stimulus was a big-government solution to a problem that should have been left to the free market to solve.  Recessions are part of the business cycle and this one would have eventually ended on its own; the massive expense of the ineffectual stimulus bill will now slow down future growth.
  • It Didn’t Work: Unemployment today is higher than when the stimulus bill passed Congress.  Growth remains anemic.  This $800 billion boondoggle didn’t solve our problems.

The Stimulus Needed to Be Bigger:

  • More Stimulus Needed: The depth of the recession in 2009 suggested that we needed a stimulus of about $1.2-1.5 trillion.  Obama’s package was thus only about one-half or two-thirds the size needed to do the job.  As Keynesian economists like Paul Krugman predicted, the stimulus stopped the bleeding but wasn’t big enough to really drive robust growth.
  • Stimulus Poorly Targeted: The tax cuts in the stimulus didn’t provide a very strong economic stimulus, because people tended to save those refunds rather than spend them.  The stimulus should have devoted that money (about $300 billion) to infrastructure projects or (especially) aid to state governments, both of which would have put more people to work and done more to stimulate the economy.

8 thoughts on “Shmoop Politics Guide: Obama’s Stimulus Package

  1. Informative and well written post. I tend to lean more towards the “this is part of the cycle/ gets your hands out of the economy” approach. And I disagree with @Nancy, you did a great job of offering multiple viewpoints.

  2. “But then Friedman’s model proved unable to solve the economic and financial crisis of 2007-09″. Friedman’s model wasn’t given the chance to solve it. If it was, both Bush and Obama would have stayed out of it and let the chips fall where they may. More companies would have collapsed which would have created more opportunity for the American Entrepreneur to jump in and do it better, faster, cheaper.

    Also, this global recession, caused by the real estate bubble, would never have happened if we followed Friedman’s spirit of keeping the government out of the economy, specifically the mortgage industry. The grand experiment started in the 1990′s with the Federal Gov’t telling Fannie Mae and Freddie Mac to back loans to people who couldn’t afford them. The theory was that if a poor person was given the chance at owning a home, they would rise to the challenge. After over a decade doling out a trillion dollars of bad loans, the house of cards fell.

    A bit more counter-point to Keynes’s work on the Great Depression would be helpful. After the 1929 stock market crash, the economy was quickly on the mend until the Gov’t stepped in with tariffs and tanked it. Thomas Sowell, a student of Friedman’s, elaborates nicely here:

    http://townhall.com/columnists/ThomasSowell/2008/12/23/another_great_depression

  3. Obama ran as a Democrat and he knew what he was inheriting when he ran for office, since I believe it was the Democrats babies that contributed in a huge way to this downturn – - Can you say Fanny Mae and Freddie Mac. The Democrats protected their babies Fannie and Freddie and did not discipline them and monitor them as they should have – so as I said before they (the Dems) have no one to blame but themselves for the housing mess. . . . .And let’s not forget that the Dems took control of Congress in 2007. They had control of the ‘purse strings’ and the ‘crafting of legislation’. Yes, Bush could Veto some things that they would have wanted to pass – but still – the Dems were at the helm.

  4. Addressing Chris Finne’s statement as follows: “The theory was that if a poor person was given the chance at owning a home, they would rise to the challenge. After over a decade doling out a trillion dollars of bad loans, the house of cards fell.”

    It was a terrible decision for our government to butt it’s nose into experimenting with our economy by giving poor people a chance at owning a home that they couldn’t afford – - these people have a hard time rising to the occasion and that’s why their poor (whether it is because they just don’t make enough money, or because they are too irresponsible, or too lazy) – - it is a mistake to have tried this experiment on such a MASSIVE level !!! . . . . . Normally when you test the waters you do it on a SMALL scale first…….

    This is why we need our government to BUTT OUT of certain things……

  5. The reason our economy is NOT on a quick mend is probably because this administration keeps adding masses amounts of debt to the debt – they are digging us a hole we may not get out of for a long long time…..

    Also, during the great depression the president back then – got people to work on MANY infastructure projects…. this administration has done no such thing on the massive scale. For instance – they could have started the high-speed rail system across the country or rebuilt the aging bridges, etc., etc., etc., BUT they didn’t. . . .

  6. Instead of a Stimulus Package – the Illegal Immigrants should have been deported. Our government has eyes and ears everywhere – and it is rediculous that they say it isn’t feasible to do that. Bull-hockey ! It was done in the past – during all of our down periods (except this time). We cannot keep throwing money at the problem without addessing the LACK OF JOBS. Illegal Immigrant do many lucritive jobs in America (they don’t just pick fruit and clean homes or mow lawns), with their fake I.D.s they work on Federal Roadway jobs, other construction jobs, FedEx and UPS, meat packing companies, etc., All are well paid jobs that Americans deserve !!!

    We can’t afford being overly gracious to people who are so selfish that they sneak over our borders, buy fake I.D.s – - (I.D.s of Americans – even our baby’s, therefore ruining our childrens futures unbeknowst them them until they become old enough to start working), they use our SS numbers and identities to get a better life for themselves – however – - these acts of criminality are taking that “better life” away from American citizens (who are the lucky deserving people) It just doesn’t make sense as to why America’s politicians give more thought and kindness to illegals than to their own citizens – - are they that clueless !!! …..This must stop

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