Why Economic Stimuli Work, When Used Appropriately, and Why the Tea Party is Wrong in Saying That It Won't
One More TIme
THIS HUB WILL USE JUST WORDS and Charts, not numbers, in an attempt to explain why, when properly used, government stimulus' will work. Even though Conservatives say that in 100% of the cases, a stimulus is science fiction and will fail, the theory behind the various kinds of stimulus, all of which are in President Obama's 2012 jobs bill, is actually very sound and very logical. Unfortunately, because the economy is also very complex it is very hard to explain in sound-bites. something the Conservatives count on in their deception of America,
This is why Conservatives are so darn successful in making their case; OK why, because it is so darn hard to present the truth to a populous who is not in the mood to use their collective brains when it is their brains that are needed to understand the truth; you see, you don't need a brain to comprehend a lie, just gullibility.
GUESS WHAT FOLKS, THE ECONOMY IS A VERY COMPLEX THING - WHY SHOULD YOU ACCEPT SIMPLE EXPLANATIONS FROM THE CONSERVATIVES?
THE TACK I WISH TO TAKE ON THIS FORAY into trying to explain how the economy works (from a non-economist to non-economists, fun, huh?) and why a stimulus can work in certain, appropriate circumstances. To do this we will use a series of almost numbers free charts which portray money and manpower flow, over time. I have "tanks" (boxes) that represent the pools of employed and unemployed workers as well as for dollars poured into contractors and out to owner's profits and back to the government in taxes. There are also tanks for the pools of dollars available from tax cuts, unemployment benefits, and actual stimulus that went to contractors. All of these things which I underlined play an important part in the stimulus process and the lines on the chart connecting the various tanks are what make it complex.
Each chart represents a point in time and I tried to make each chart look like the one before it to reduce confusion, although I did some manipulations for clarity. Three things will change from chart to chart:
1) going from dashed or dotted lines to activation,
2) the thickness of the lines to show amount of flow; thinner-less flow, thicker-more flow, and
3) how full the tanks are.
As I said, the thickness and fill-levels are intended to show the "flow" of money and workers as time goes on. Hopefully this will illustrate why President Obama couldn't replace all of the jobs lost in the first few months after Bush left office. Almost before the first stimulus dollar started flowing, Conservative economics had cost the country 4.7 million jobs between Sept 2008 through March 2009, something the Conservatives would have you believe Obama should have been able to easily and quickly fix (at least those who thought there was an actual problem) all the problems the Conservative economic philosophy had caused. If Conservatives had simply looked back in history and studied the causes of the two dozen recessions under their economic watch, Obama wouldn't have had to go through all of this pain. Consider what he might have been able to do if he hadn't had to repair the economy.
First, Let Me Explain the Charts a Bit
LET ME START BY RESTATING THE FUNDAMENTAL PRINCIPLE on which a stimulus is based,"for a stimulus to work, the money the government infuses into society, regardless of source, must be spent by society back into society," in other words, a stimulus won't work in all circumstances, but, it will work in some; all, but Conservatives, understand this principal.
When will a stimulus NOT work? When the people and institutions the stimulus money is directed to have realistic choices on whether to spend it in the economy or save, reduce debt, invest out of country, or other ways that won't generate demand. It also won't work when the debt generated by the stimulus "squeezes out" capital available to business for expansion.
When CAN a stimulus work? When the economy is in such a state that the vast majority of any money put into it by the government will immediately be returned back into the economy. If you thought the economy right after the 2008 Great Conservative Recession would be prime for a stimulus ... it was. But, why didn't it seem to work as well as it should have? I will get more into that later, but one reason, which surprised me, is that in spite of things being so dire, Americans went from a near zero national savings rate to an almost 5% savings rate today; what an irony! For decades upon decades economists have been trying to get Americans to save, for the good of the economy, but, right at the moment when it was bad to save, we do; go figure. (When the economy is robust, saving makes the economy even better by providing money for investment, but, when the economy is in the tank, saving increases the depth of the tank by taking money out of circulation and reducing demand.) Anyway, this saving frenzy took a little of the oommph out of the 2009 stimulus.
Nevertheless, if there ever was a time for a stimulus, this was it. Chart 1, below, tries to describe the state of affairs at the beginning of 2009, before President Obama took office, before there was a stimulus, but just as the recession was starting to take off; under the radar as the 4th quarter 2008 data was not yet in; they wouldn't be in until it was too late, 30 - 40 days late, for the stimulus team to build in their information into the plan and that was devastating, in and of itself to the President and country.
Let me try to lead you through that mess of tanks and lines; it really does make sense after you stare at it long enough, lol. Almost all of what you see are empty tanks made up of dotted lines which are connected by dashed lines. They are empty, dotted and dashed because there is nothing in them and nothing flowing through them.
Starting in the upper left, you see three tanks labeled with words followed by "$$" signs. These represent the Stimulus; in the next chart, they will start filling up with borrowed stimulus money. Below them are dashed arrows leading down to other tanks labeled "Unemployed Americans #", "Newly Hired Americans #", and "Contractors Hired". The first two tanks represent the number of Americans in either an unemployed or employed status. I include one of the few numbers in this analysis with the Unemployed Americans so you can track the actual number of Americans dislocated because of the 2008 recession; there is more than actually because job losses started in 2007, but I am starting my count in January 2008. The other numbers are the size of the various stimulus programs.
Moving to the upper middle, the "Contractors Hired" is a tank of Dollars and represents the hiring of 1st Tier contractors for the "shovel ready" contracts that weren't there just yet; other things were though, such as funding to states to save state government jobs, so money started flowing. From this tank, money goes four directions: 1) to the left to either hire new American workers are pay current American workers who will get fired otherwise, 2) to owners in the way of profit for those dollars that went into contracts, 3) to other contractors needed to do the work they were hired to do (these become part of the economy later), and 4) back to the government by way of taxes.
There are several "Contractors Hired", "Owner's Profit", and "Taxes Collected" tanks scattered about the charts to keep down the number of lines from crossing but they all mean the same thing. The final two tanks, are the US Treasury, where the taxes collected flow to and the "Pay Back Stimulus" tank which represents the ability to pay off the money borrowed to provide the original stimulus.
OK, a couple more conventions. When a flow or a tank come into play, the lines around it become solid. As flows increase, I thicken up the lines to indicate more money or people flowing between the two tanks and thin them back down when the money dries up. Finally, as tanks fill up or drain, I show that by increasing the amount of blue in the tank.
I do all of this so that you can get a feeling, as you go from chart to chart as time passes, of things changing, how they change, in what direction they change, and when they are able to change. One of the main reasons I am going through this is to try to make it clear (and complexity makes this very hard to do) why President Obama and his stimulus wasn't able to pivot on a dime, as so many Americans expected and are now making him pay a very high price for failing to do, and replace the 14 million jobs lost in the Conservative financial meltdown.
CONTRATULATIONS, IF YOU ARE STILL WITH ME!
THE MOST IMPORTANT area of this first chart, and all of the rest, to focus on is the part down in the lower left with the big black square labeled "The Economy"; later, it expands to take up a larger portion of the chart. This area is the whole point of the stimulus! It respresents the American economy and is empty to show how anemic the economy is, as of January 2009. The purpose of the stimulus is to turn this tank blue and make the arrow going up to "Newly Hired American #" nice and thick but slightly smaller than the arrow coming back down to "Contractors Hired" (which represents Total Demand, but more about that later.) If that happens, then you have a sustaining economy and the stimulus worked.
As we work our way through the time series of charts, you will see how this tank begins to fil up and turn blue. I will try to explain how this happens, and hopefully you will be able to see this via the charts. I feel it is vitally important for you to understand this because you are choosing a President and Congress based on whether you believe the Democrats and Obama tried to do the right thing and know what they are talking about or that the Conservatives do by claiming stimuli never work, only cutting regulations and taxes do.
The only thing I want to add to CHART 1 is that as we rolled into January 2009, there were already 2,600,000 unemployed workers on the books as a direct result of recent layoffs due to the building recession in 2008. TARP had just been approved; Obama was in the process of forming his stimulus team and the rest of his government; the 3rd Qtr 2008 economic numbers were suggesting this was going to be a "bad" recession but not a "terrible" one even though the financial institutions were collapsing.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 1/1/2009
THE STIMULUS GETS FUNDED - 3/1/2009
ALREADY PRESIDENT OBAMA is getting criticized for taking too long, he has been president for about 40 days, but the stimulus, already judged a failure by the Conservatives, is ready to roll out. It consists of three main elements: 1) an extension of unemployment benefits and some health insurance premium subsidies, 2) tax cuts, and 3) the most controversial, the direct stimulus and state government relief; the amounts of each are provided on the chart and as we know now, because the 4th Qtr, 2008 economic data was not available in time, was woefully inadequate.
In any case, the Obama administration predicted this amount of stimulus, through its various mechinisms, which we will discuss in coming charts, would save or generate about 4 million jobs. In fact, according to the CBO and other independent agencies, Obama generally succeeded in reaching this goal. Unfortunately, more than 4 million jobs was needed.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 3/1/2009
THE MONEY BEGINS TO FLOW
THE FIRST stimulus money to hit the streets is unemployment benefits. This money flows directly from the government, into American pockets and right back out again into the pockets of retailers all across America, quickly; very quickly. What effect does it have? Remember, these are dollars that would not have been otherwise paid out in benefits to unemployed workers because their benefits had run out. These are people who would probably find themselves out on the street shortly because there were no jobs to be had; they were still being shed at a rate of 700,000 per month! So, to the retailers receiving these greenbacks, they are a lifesaver because the forces around them are all downward, strongly downward. The effect of this part of the stimulus, therefore, is one of stabilization; it is priming the pump, as it were. On the chart, you can see this flow by tracing from the "Unemployment Benefits $$" down through "Unemployed Americans #" and over to "Contractors Hired" in "The Economy" area. This last arrow represent "Demand" on the economy for "services" and "product".
Next is the Tax Cut in the form of reduced withholding and rebates. This also put money back in the hands of consumers, but is not as powerful as the unemployment benefits; why not? Because not everybody needs to go out and spend the money like the unemployed do. In this case, many people used the extra money to pay down debt, which is a form of saving, and does not have a stimulating effect economically. Nevertheless, much was spent by working Americans on goods and services. You can see this as well by following the arrows down from "Tax Cut $$" down through "Newly Hired Americans" (a misnomer in this case), and down to "Contractors Hired" as "Demand" on the Economy.
Finally, we have the "Direct Stimulus $$". This is both money sent to contractors for stimulus projects as well as funds to states to help keep government employments employed. In the April time frame, we are only talking about the state monies for there weren't really in stimulus projects ready to go. As a consequence, the impact of this aspect of the program is similar to that of the tax cuts and the unemployment benefits ... stabilization.
The reason there is no blue in the right two tanks, is there has been no time for contractors or Americans to be hired.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 4/1/2009
THE STIMULUS BEGINS ITS WORK
JUNE 1, 2009, the time frame begins to pick up and the stimulus starts to have an impact. If you look at CHART 4, you will see a few changes. Some tanks are starting fill up, some arrows are thickening up indicating more money or manpower flow.
You will notice the line between the unemployed and employed American tanks became solid and the "Newly Hired Americans #" tank has a little blue at the bottom, as does the "Contractors Hired" to the upper right of the newly hired tank. This is telling you that as a result of stimulus money going out to contractors in the form of contracts, those contractors are turning around and hiring formerly unemployed Americans; are you getting a feeling of how this is working? Another new thing is that new contracts are also generating profits for the owners who, in turn, spend some of that money in the economy.
So, what is happening now to the economy, the big black square, and the new profits being generated in the business sector from demand created by the unemployment benefits, tax cuts, and direct stimulus is beginning to generate some tax revenues of its own? Unemployment is still growing at unprecedented, but not quite as high a rate; businesses, with the passage of the stimulus and TARP now sense that government is actually trying to correct things; this is most dramatically reflected in the stock market turn-around in March 2009; it is now well on its way to a major recovery. Unemployment benefits, normal and extended ones from the stimulus are entering the economy at an enormous clip while the tax cuts are filtering their way in as well.
All of these things are plugging the economic hole and have all but stopped the economic decline. It is still not nearly enough to completely stop the layoff juggernaut created by the Bush recession; how do you stop a run-away train going at full-throttle? Carefully, slowly.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 6/1/2009
EVERYTHING IS IN PLAY AND MOVING NOW
ALL OF THE pieces are in place now. CHART 5 depicts money beginning to flow from the Tier I stimulus related contractors to Tier II contractors brought on board to complete a project or suppliers/vendors benefiting from the stimulus money. In the next couple of charts, the TIER III contractors will be brought in. This process is called the "multiplier effect" of the stimulus where one stimulus dollar begets other dollars flowing in the economy; this is part of what makes a stimulus work and this is how it looks in chart form.
You can see in the rest of the chart that by October 2009, much of the Unemployment, Tax Cut, and Direct Stimulus to Government Workershas been put into the economy and is flowing directly into "The Economy" itself; the left side of the chart. The flow of money is going from the stimulus, directly through American's pockets, into vendor's (contractors hired) pockets, back into owner's or worker's pockets, back into vendor's pockets, back into owner's .... and so on; hopefully a circular flow that continues to get stronger.
At this point in time, it is not self-sustaining. To help keep it sustaining is what is happening on the right side of the chart. The Direct Stimulus to Contractors is given contractors who hire workers, hire other contractors, buy supplies, pay owners, and pay taxes. Those workers that are hired, spend their money as if having received the other kinds of stimulus while the other contractors can be treated as the original contractors as can those vendors from whom supplies are purchased. As I said, all of these flows are shown on the right side of the chart.
The last the new change on CHART 5 is turning on the "Pay Back the Stimulus" tank. This isn't to say that any of the funds flowing back into the Treasury is ear-marked for paying back the stimulus; they could have been, but probably weren't.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 10/1/2009
I WILL SET time in motion now since all the facets of the stimulus are working at this point. What is happening now is the TIER III contractors are hired and money is flowing through the system in larger and larger quantities. The trick, of course, is to get a large enough amount of money flowing that it becomes a self-sustaining flow after the stimulus money is gone.
The following set of charts present the flow of stimulus funding in snapshots of time from Dec 31, 2009 until Dec 31, 2010. I hope you are able to follow what is taking place.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 12/31/2009 - 12/31/2010Click thumbnail to view full-size
A WORD ABOUT JOB LOSSES
THE NUMBER of Unemployed Americans I present you on these charts is simple. I start at a baseline of zero unemployed as of January 1, 2008 and start adding the monthly net number of jobs lost each month, except for 2008 itself, that is the net for the year; over a million of those were in November and December 2008. In November 2009, and starting January 2010 for awhile, we had a series of net monthly job gains; these, I subtracted. Because you are dealing with gains and losses all happening at the same time, it is hard to tell what is really happening but let be try to talk you through a little logic.
We do know a few things:
- From Nov 2008 until about Jun 2009, all net job losses are true job losses, very little hiring was taking place on its own, and it was too early for the direct stimulus to have any real effect.
- Business didn't start becoming confident until after April 2009, as indicated by the reversal in the stock market; that is when lay-offs started slowing down on their own and the first true benefits of the TARP and stimulus were realized
- There were steady net gains since except for the period June - September 2010.
- Total unemployment topped out at 6.9 million in December 2009; this after a net gain of 64,000 jobs in November
- Total unemployment in Aug 2011 is 4.8 million jobs. This means, that mathematically speaking, the stimulus had to had generated at least 2.1 million jobs!
OK, I need to confess something to you, I am exaggerating slightly ... maybe, possibly; why am I waffling with my equivocation? Well first the bit about the exaggeration (boy, I would never make a politician, would I!). The 2.1 million jobs is a good number, but, on the face of it, there is nothing saying that they ALL had to come from the stimulus, as I, and any good politician would, have just implied. Somecould have, indeed, it is only common sense some would have come from the stimulus; but all of them? Weellll, in the case, yes, I think so, at least that many, and here is why.
From Nov 2008, through Feb 2009, before the stimulus, but as TARP was being implemented, you had the following accelerating job loss history; 333,000; 632,000; 741,000; and 681,000, respectively. The ARRA was passed in February 2009, and the stimulus program was initiated in March 2009.
No one can say for certain what would have happened if there had been no stimulus, but most reputable economist, including President Bush's, said we were heading toward a 1929-style depression. That let's me, as an old cost analysts, which is what the CBO is made up of, make an assumption, for sake of argument - the rate of job losses would have remained at 600,000 or higher for the remainder of the year. Why can I safely make that assumption? Because job loss equivalent during the 1929 depression was worse. Based on that assumption, then I can extrapolate the following:
- total expected minimum job loss for 2009 without the stimulus is 7,422,000
- Add the 2008 job loss of 2,600,000 for a total 10,022,000 by Dec 31, 2009.
- Also assume for the moment we took the Conservative course of no intervening action by the government, then I must assume this depression would have taken the same course of previous great depressions with no government interventions (most of the 1800s) meaning the economy took more than 12 months to show any signs of recovery and generally more than 36 months for employment to get back to normal.
- Based on 3 above then, total Unemployed Americans, starting from my 2008 baseline of zero, at December 31, 2009, must also be a minimum of 10,022,000 because, in financial-type recession/depressions, recoveries are historically slow and no job hiring can be expected 12 months after the depression began.
- To summarize then, since it would not be logical to expect any jobs to have been created naturally had the depression been left to manage itself on its own as the Conservatives wanted, history supports this notion well, then any jobs created because there was stimulative action by the government must be assumed to have resulted from the stimulus.
- To say it another way, without the stimulus, we would mostly have still been shedding jobs by December 2009. The fact that we were not but had actually brought job loss down to almost zero has to be attributed to either the actual impact of the stimulus or the psychological impact of the stimulus.
- I would argue strongly that one of the reasons we have not fully succeeded in recovery is that the Conservative, through their constant campaign of negativism and self-destructive mission to unseat President Obama, has all but wiped out the positive psychological impact stimulus by inserting very large quantities of uncertainty in the picture for businesses.
BRINGING IT UP TO-DATE
THERE IS STILL funds programmed to flow into the economy from the original stimulus authorization even as late as January 1, 2011; President Obama said this right up front, the stimulus was a a long-term fix to solve a problem that took ten years to develop. Nevertheless, in terms of the stimulus, it is basically out out there and working and might have been a success in spite of its under-prediction based on 3rd quarter economic data and the political impossibility of adjusting the stimulus program to meet the needs indicated by the 4th Quarter information; the Conservatives made sure that wouldn't happen. But the constant drumbeat of psychological negativismand partisan rhetoric decrying at every possible moment that Obama is a failure and so is his stimulus and that America never left the recession or reentered the recession (they couldn't make up their mind, apparently) had, in the end, the predictable result; it turned the mood of America sour; it turned any optimism business may have had into caution and business, staying true to the Conservative's self-fulling prophecy, ended up sitting on their money and refusing to hire while waiting for this absolutely stupid and unnecessary political conflict to resolve itself. It it seems I am laying this directly at the feet of Conservatives, you bet I am (and I am a Colin Powell-type Republican, to boot, lol.)
Anyway, the following charts depict what has happened in the last eight months of the stimulus.
THE PROGRESSION OF THE OBAMA 2009 STIMULUS - 4/1/2011 - 8/1/2011Click thumbnail to view full-size
THIS NEXT set of charts recapitulates all of the ones I have shown previously but they are presented as a set of thumbnails so that you can flip through them faster and get a better sense of the flow over time.
THIS LAST chart strips away most of the detail and leaves only the basic flow of funds and manpower in a, hopefully, self-sustaining economy. Those big green, circular arrows show the flow of money threw various parts of the economy; from vendor to labor back to vendor; from vendor to owner back to vendor; from vendor to taxes to Unemployed Americans to vendor, etc.
THE ECONOMIC FLOW
CLEAR AS MUD, RIGHT?
© 2011 Scott Belford