On Feb. 13, 2009, Congress passed the American Recovery and Reinvestment Act of 2009 at the urging of President Obama, who signed it into law four days later. A direct response to the economic crisis, the Recovery Act has three immediate goals:
- Create new jobs as well as save existing ones
- Spur economic activity and invest in long-term economic growth
- Foster unprecedented levels of accountability and transparency in government spending
The Recovery Act intends to achieve those goals by:
- Providing $288 billion in tax cuts and benefits for millions of working families and businesses
- Increasing federal funds for education and health care as well as entitlement programs (such as extending unemployment benefits) by $224 billion
- Making $275 billion available for federal contracts, grants and loans
- Requiring recipients of Recovery funds to report quarterly on the amount of monies spent, the status of the project, the number of jobs created and/or saved, and other details, all of which are posted on Recovery.gov so that the public can track where the total $787 billion Recovery funds are going and how they are being spent.
In addition to offering financial aid directly to local school districts, expanding the Child Tax Credit, and underwriting a process to computerize health records to reduce medical errors and save on health care costs, the Recovery Act is targeted at infrastructure development and enhancement. For instance, the Act plans investment in the domestic renewable energy industry and the weatherizing of 75 percent of federal buildings as well as more than one million private homes around the country.
Construction and repair of roads and bridges as well as scientific research and the expansion of broadband and wireless service are also included among the many projects that the Recovery Act will fund.
While many of Recovery Act projects are focused more immediately on jumpstarting the economy, others, especially those involving infrastructure improvements, are expected to contribute to economic growth for many years.
Even if the economy does pick up in the next few months, it will be hard to assign credit to the stimulus package. That’s because the Federal Reserve has been providing vast amounts of monetarystimulus to the economy, cutting interest rates to near zero and doing other things to boost liquidity and spur lending such as buying up so-called toxic securities from banks.
The problem is that when you rush a patient to the ICU and inject him with three drugs, it’s tough to know which one saved his life. We don’t know how the economy would have fared had the stimulus legislation died a quiet death on Capitol Hill this past winter, although we do know that the monetary stimulus has been massive.
Even if we assume that the stimulus package will reduce the severity of the recession, as many economists do, will it have been worth the cost? The nonpartisan Congressional Budget Office estimates that the federal budget deficit for 2009 will total $1.6 trillion, or more than 11 percent of GDP.
The stimulus bill, even when it’s fully spent, will only be responsible for less than half of that, but it’s still a serious chunk of change. The mounting red ink increases the risk of the “crowding out effect” — higher borrowing to finance the deficit means more investment in government and less private investment. It also sends interest rates higher. In effect, we may be borrowing growth from the future and at a steep price.
The Federal Reserve’s actions could also contribute to higher interest rates and higher inflation down the road, since the Fed has been printing money and lowering interest rates. In some ways, that’s the point — inoculating the economy against a lengthy bout of deflation — falling prices — is a key goal of the Fed’s monetary policy of late. The trick will be nipping the inflationary effects in the bud so that they don’t end up gaining momentum and hurting economic growth in the long run.
The full price tag for stimulating the economy may eventually look reasonable, but only if all or most of the government spending greases the wheels of the economy and leads to additional spending and economic activity. Stay tuned.
Joe Tufo is President of Cash Flow Specialists, Inc. in Concord CA. A full service Intermediary, Finder, Funding Source and Business Consultancy established July 1999, Tufo has consulted with and funded hundreds of businesses in all 50 states and several foreign countries. You may email him at joe@joetufo.com or visit his websites at http://www.joetufo.com/blog or http://www.workingcapitalfast.com