Other economists aren't so sure that the stimulus was the fulcrum of recovery. One surprising nomination for Hero of the Great Recession: The government stress tests! (Seriously?)For the third quarter, economists at Goldman Sachs & Co. predict the U.S. economy will grow by 3.3%. "Without that extra stimulus, we would be somewhere around zero," said Jan Hatzius, chief U.S. economist for Goldman.
Well look, I don't know nearly as much about economics as the chief US economists of two of the most well-known financial companies in the world. But the $100 billion of stimulus spent since January represents only four percent of the administration's $2 trillion of economic rescue, including the bank and auto bailouts, the mortgage rescue and so on. Even if it's been effective at holding together Medicaid and state budgets, spurring home and auto purchases, keeping Americans at work and propping up consumer demand, I don't understand how it could be responsible for an additional 3.3% annualized growth in the third quarter.Opinion, however, remains split about which program has had the biggest impact. "I don't think the stimulus was necessarily as effective as people claimed it to be or claim it will be," said Joseph LaVorgna, chief U.S. economist with Deutsche Bank Securities Inc. He credits the government's "stress tests" of banks, which helped boost confidence on Wall Street and allow banks to raise capital and resume lending.
The obvious explanation is that the rest of that $2 trillion in spending (all borrowed) was injected into the economy somewhere. It might be going into bankers wallets, but it was still stimulus. It didn't sit around in a big pile of bills somewhere.
Your contention doesn't compute at all. If it hasn't been spent then how can it be providing stimulus?
The "stimulus" was the recapitalization of the banks after the mark-to-market rule was defanged. That is what caused the otherwise inexplicable turnaround.
I am usually loathe to insult the private sector, but Goldman Sachs shills shamelessly for whatever regime is in power. That company is full of Beltway prostitutes. $120B in pork money causing a growth of 3.3% in a $14 trillion economy?! Are you kidding me? Seriously, that is beyond laughable. You guys at GS are over the top.
Nobody but nobody was arguing that the stimulus was working this summer when it was obvious we were in a rebound, because virtually none of the money had been spent. It is only now that they think people have forgotten recent history that they come crawling out trying to rewrite history in favor of their new Medicis.
After falling considerably, and progressively more deeply in each of the three quarters before the most recent one, the fall in GDP moderated substantially. After declining at an annual rate of 6.4% in the first quarter of 2009, it fell at a rate of 1% in the second quarter. The rise in GDP growth from the first quarter to the second was the largest in almost a decade, and the second largest in the past quarter century. What might have caused this sudden reversal in the second quarter?
There are essentially three elements to the government's economic recovery program: 1)Monetary Policy, 2)TARP and 3)ARRA (stimulus). Of the three elements the only one that matches the timing is stimulus.
With respect to monetary policy the Federal Reserve's main policy instrument, the federal funds rate fell from 2% at the end of the second quarter of 2008 to 1% by the end of the third quarter to 0%-0.25% on December 17. The Federal Reserve has also engaged in some unconventional policies nearly all of which are reflected in its balance sheet. The Federal Reserve's balance sheet surged from $880 billion at the end of the second quarter of 2008 to $1.2 trillion at the end of the third quarter to $2.25 trillion at the end of the fourth quarter. Since then however it has contracted to $2.06 trillion by the end of the first quarter of 2009 and $2.01 trillion by the end of the second quarter.
I understand that monetary policy has lags but throughout the time that monetary policy was easing the economy gor progressively worse with real GDP growth going from 1.5% in the second quarter to -2.6% in the third quarter to -5.6% in the fourth quarter.
TARP first went into effect in late October of 2008. By the end of the fourth quarter over $450 billion of the $699 available had gone out. This increased to over $538 billion by the end of the first quarter of 2008. Between then and the end of the second quarter another $100 billion went out but $70 billion was returned. Thus of the net disbursements by the end of the second quarter ($568 billion) approximately 95% had been disbursed by the end of the first quarter.
TARP's purpose was to strengthen the financial sector in order to get lending going again after it froze in late summer of 2008. Some people credit TARP with the sudden turnaround in economic performance in the second quarter through this channel. So far there is no evidence that TARP has had much of an effect in this regard.
Net lending to households and businesses in the nonfinancial sector according to the Federal Reserve's flow of funds report fell from about $710 billion in the second quarter of 2008 to $550 billion in the fourth quarter to -$100 billion in the fourth quarter to -$180 billion in the first quarter of 2009.
The flow of funds report is scheduled to be released by the Federal Reserve next week. But it's already been reported by Moody's economy.com that net lending to households and nonfinancial corporate businesses, which account for over 83% of the debt held by households and businesses in the nonfinancial sector, fell from about -$10 billion in the first quarter to -$60 billion in the second quarter. Thus more than likely next week's report will show that net lending to households and businesses in the nonfinancial sector fell yet again in the second quarter.
This also has implications for two other things that occurred in the second quarter besides the stimulus: 1) the easing of Mark to Market in April, and 2) the announcement of the stress tests in May. Both of these were supposed to have led to a resumption of lending. Preliminary results indicate that so far that has not happened.
The bottom line is that based on the timing and the data it strains credibility to credit monetary policy or TARP (or even MTM liberalization or the announcement of the results of the stress tests)with the sudden turnaround in economic performance in the second quarter.
It is tempting to argue, as the author of this article does, that since only an eighth of the stimulus had been spent by the end of the second quarter that a similar proportion of its effect should be felt so far. But a discretionary fiscal stimulus is qualitatively different in its expected effects on the economy than TARP or the monetary policy measures taken. That is because its effects are proportionate to its flow rate and not its stock amount. The stimulus will be spent at a peak rate of about $100 billion a quarter through the end of fiscal year 2010. Thus as of the second quarter it was already being spent at that rate. Nevertheless, due primarily to rising multiplier effects and changing composition its effects should continue to increase at least through the end of fiscal year 2010.
Econometric analysis performed by Moody's economy.com, Macroeconomic Advisors, Goldman Sachs and the Council of Economic Advisors (CEA)credit the stimulus with adding 3.0%, 2.2%, 2.2% and 2.3% respectively to GDP growth in the second quarter. The average of these four vector autoregression analysis (VAR) is thus about 2.4%. To achieve that kind of an impact the stimulus must have boosted the second quarter GDP by about 0.6% above its nominal value of about $3.5 trillion or by $21 billion. That is entirely possible as I shall now explain.
First of all the stimulus has two components: 1) direct spending and
2) tax expenditures. Weekly direct spending figures are available from recovery.gov. Up until now the tax expenditures have been hard to come by but recently recovery.gov has started reporting them.
Direct spending totaled about $9 billion in the first quarter of 2009, $47 billion in the second quarter and so far $33 billion in the third quarter. Tax expenditures totaled about $3 billion in the first quarter, $40 billion in the second quarter and so far $19 billion in the third quarter.
It's also tempting to argue that the tax expenditures could not have had any effect because they would only end up in people's wallets come April 15th. However Making Work Pay, the expanded tax break for 2009 first-time home buyers, the sales tax deduction for vehicle purchases, the exclusion of up to $2,400 of unemployment insurance benefits from gross income, the energy incentives, the bonus depreciation, the carryback of net operating losses, the deferral of income from debt writedowns and COBRA all pay out immediately through a refund or through reduced withholding.
Thus it is clear that $99 billion of the stimulus was spent directly or was in people's pockets by the end of the second quarter. To achieve the effects that the econometric analysis suggests that it has had only $21 billion of that had to have actually ended up as net additional spending or less than a quarter.
So it seems to me based on the timing, the data and the econometric analysis Jan Hatzius knows what he is talking about. And Joseph LaVorgna? Maybe not so much.
P.S. Since TARP has been a complete failure so far in increasing lending, why don't we repeal it, get the money back, and spend it on something that is working: STIMULUS!