Obama Stimulus Fails to Reboot Economy as No Multiplier Effect

[frawin]

Obama Stimulus Fails to Reboot Economy as No Multiplier Effect



By Matthew Benjamin and Alison Sider

July 17 (Bloomberg) -- The debate over whether the $787 billion stimulus package is sufficiently large or efficiently designed obscures a broader question, some economists say: Can any fiscal measure pull the economy out of the recession?

With credit still crimped and the outlook for consumer demand gloomy due to rising unemployment and increased personal saving, no amount of government intervention will be able to stanch the hemorrhaging of jobs and quickly ease the U.S. out of its deepest recession in a half-century, they said.

“Many households that want to borrow can’t, and many that can borrow won’t because they now must save for retirement the old-fashioned way,” said Richard Clarida, global strategic adviser at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest bond-fund manager. “As a result, the multiplier from even a well-designed stimulus package is likely to be quite modest.”

The stimulus plan passed in February “is executing pretty much as expected,” yet it “won’t affect the economy’s primary problems, which are falling values of assets like homes and stocks,” said Doug Holtz-Eakin, who was director of the Congressional Budget Office from 2003 to 2006 and is now president at DHE Consulting LLC in Washington. So far, about $60 billion in spending and $43 billion in tax relief has been dispensed, accounting for 13 percent of the plan’s total.

Bond Yields

The slow pace of recovery has driven bond yields lower as investors continue to seek the safety of U.S. government debt. Ten-year note yields are down 38 basis points, or 0.38 percentage point, since June 10.

The outlook for many companies also is clouded. Second- quarter profit at General Electric Co., the world’s biggest maker of power-generation equipment and services, probably fell by more than 50 percent, according to the average estimate of 13 analysts surveyed by Bloomberg. Most benefits from the stimulus plan won’t arrive until next year, the Fairfield, Connecticut- based company’s chief executive officer, Jeffrey Immelt, told investors May 19.

Proponents of the stimulus said the economic situation and the prospects for recovery would be much bleaker if no fiscal response had been put in place.

“It’s working, it’s demonstrably working,” said Jared Bernstein, chief economic adviser to Vice President Joseph Biden, whose office is overseeing the stimulus rollout.

Even though a second stimulus package is unlikely at this point, those advocating such a measure said it may be needed precisely because the effects of the first have been so modest.

‘Multiplier Effect’

The combination of rising unemployment and thrifty consumers “definitely lowers the multiplier effect” of every stimulus dollar spent, said Dean Baker, a co-director of the Center for Economic and Policy Research in Washington. “That just means you need more stimulus. There’s really no alternative.”

Obama administration officials such as Treasury Secretary Timothy Geithner said the measure needs time to work and are appealing for patience.

“The stimulus program was designed to make a contribution over a two-year period and the biggest impact on investment will come in the second half of this year,” Geithner said yesterday in an Internet chat with Les Echos newspaper in Paris.

Martin Feldstein, a professor of economics at Harvard University in Cambridge, Massachusetts, and former head of the National Bureau of Economic Research, said the stimulus may provide a short-term boost that will quickly ebb.

‘Fade Out’

“We’ll get that bounce for a couple of quarters but then it will fade out,” Feldstein said.

It’s too early to consider another round of fiscal priming, Geithner said. “I don’t think we’re in a position yet to make that judgment.”

For the moment, the initial measure has shown little impact. The net worth of households has fallen almost 22 percent, by almost $14 trillion, since 2007, to the lowest level in five years. House prices have fallen more than 32 percent from their 2006 peak, according to the S&P/Case-Shiller national index, while the Standard & Poor’s index of 500 stocks is 40 percent below its October 2007 level.

The crisis reminded Americans that home values can fall as well as rise and that bull markets don’t last forever, causing consumers to stash away a much larger portion of their incomes. Government data showed that the household savings rate rose to 6.9 percent in May, from zero in April 2008. The May figure is the highest in almost 16 years.

Personal Savings

Nouriel Roubini, an economist at New York University who is chairman of RGE Monitor, and Richard Berner, co-head of global economics at Morgan Stanley in New York, forecast the rate could rise to 10 percent. Economists Reuven Glick and Kevin Lansing of the Federal Reserve Bank of San Francisco estimated in a May 18 paper that Americans would continue to boost their rate of savings, which could reach 10 percent by 2018. Such a jump would trim three-quarters of a percentage point per year from consumer spending.

“There’s been a fundamental change in people’s behavior,” said Lyle Gramley, a senior economic adviser with New York-based Soleil Securities Corp. and a former Federal Reserve governor.

Rising joblessness could further damp the ability of consumers, whose spending in recent years has made up more than two-thirds of the economy, to continue to shoulder that burden.

Contractions in industries such as autos, construction and financial services have helped shrink payrolls by 6.5 million since the recession began in 2007, Labor Department figures show. The June jobless rate reached 9.5 percent, the highest since 1983.

Jobless Rate

Federal Reserve officials are anticipating a jobless rate of 9.8 percent to 10.1 percent this year, according to the central bank’s latest economic forecast. In an interview last month, President Barack Obama also said the jobless rate would exceed 10 percent before turning for the better.

In addition, the rolls of the long-term unemployed are growing, with 29 percent of the jobless out of work for more than 26 weeks, the most since records began in 1948. A broader measure of underemployment that includes those who want full- time positions but work part-time has almost doubled over the past two years, to 16.5 percent.

Consumer spending is forecast to rise 1.5 percent in the fourth quarter and 1.7 percent for all of 2010, according to a July Bloomberg survey of more than 50 economists. The average quarterly increase from 1997 through 2007 was 3.5 percent.

‘Consumption Animal’

The U.S. consumer “clearly is not going to be the consumption animal that he was for the last 10 or 20 years,” Joshua Shapiro, chief U.S. economist at MFR Inc. in New York, said in a July 6 interview with Bloomberg radio.

Retailers such as San Francisco-based Gap Inc., operator of the Old Navy and Banana Republic chains, and Abercrombie & Fitch Co., a teen-clothing franchise based in New Albany, Ohio, are feeling the pinch. Both reported June sales declines steeper than analysts estimated.

Airlines including Fort Worth, Texas-based AMR Corp., parent of American Airlines, are suffering as business travel declined. The world’s second-largest carrier’s traffic, measured in miles flown by paying passengers, fell 8.2 percent for the quarter, as American and other airlines discounted fares to fill planes. American filled 81.8 percent of its available seats in the second quarter, down from 82.5 percent a year earlier.

Credit, which consumers often turn to during recessions, remains difficult to obtain for many Americans.

About 50 percent of domestic banks tightened credit standards on prime mortgages in the first months of 2009, up from 45 percent in January, according to a survey of bank loan officers conducted by the Federal Reserve in April.

“Although financial market conditions had improved, credit was still quite tight in many sectors,” the central bank said in minutes of the Federal Open Market Committee’s June 23-24 meeting, released earlier this week.

What this means, Clarida said, is that “you’re not going to get the bang per buck that some of the stimulus proponents hoped for.”

[Varmit]

What, the stimulus isn't working??? .....WELL, NO SH44 YOU MORONS! OUR UNEMPLOYMENT RATE IS NEARING 10%, OUR GOV'T IS TAKING OVER PRIVATE BUSINESSES AND BANKS AND PASSING TRILLION DOLLAR HEALTHCARE LEGISLATION, OUR INDUSTRY HAS BEEN CRIPPLED BY RIDICIOULS CAFE STANDARDS AND THE CAP AND TRADE MORONIC BRAINFART.  WHO IN THEIR RIGHT MIND WOULD INVEST IN THIS ECONOMY?

[Anmar]

What, the stimulus isn't working??? .....WELL, NO SH44 YOU MORONS! OUR UNEMPLOYMENT RATE IS NEARING 10%, OUR GOV'T IS TAKING OVER PRIVATE BUSINESSES AND BANKS AND PASSING TRILLION DOLLAR HEALTHCARE LEGISLATION, OUR INDUSTRY HAS BEEN CRIPPLED BY RIDICIOULS CAFE STANDARDS AND THE CAP AND TRADE MORONIC BRAINFART.  WHO IN THEIR RIGHT MIND WOULD INVEST IN THIS ECONOMY?

The smartest investors buy when the economy is crashing and burning, as in, right now.

[Varmit]

No diane, I do not. I do have a small amount in gold and am looking to increase.


Anmar, I know what you're saying, however, riddle me this...Why would you want to invest in a market that is showing very few gains, espcially, when a healthcare bill that threathens to destroy small and medium sized businesses, is on the horizon?  I know that stock prices are dirt cheap right now, but to me it is just not worth the risk.

[srkruzich]

No diane, I do not. I do have a small amount in gold and am looking to increase.


Anmar, I know what you're saying, however, riddle me this...Why would you want to invest in a market that is showing very few gains, espcially, when a healthcare bill that threathens to destroy small and medium sized businesses, is on the horizon?  I know that stock prices are dirt cheap right now, but to me it is just not worth the risk.

Heres a better question.  Why would you buy into gold when it is at its highest.  Gold has a history of climing like a rocket and then sliding back down about half of what it gained.

When regan took office in 1980, gold was around 800 a oz, up from 100 a oz.  1981 gold slid and didn't stop til it stopped at around 300 a oz.

Stocks at that point were bearish as they are now and you could buy into them dirt cheap.  Then boom 1985 stockmarket started climbing and in the 90's new companies formed such as cisco and 96 amazon.com and people bought into them and raked in the money.

[dnalexander]

I think it is jumping the gun to think that the stimulus package would work in 6 months. A vast majority of the money has not even been allocated. One of our members mentioned their company got stimulus money. Most of the stimulus money has gone to existing companies and iinfastructure .That is only good for the near term. In my opinion this only acts as a brake to slow the slide down. If we really want to boost the economy and have a multiplier effect the money should go to creating new businesses\jobs not shoring up lost jobs. If you want an even easier method it should have gone back into the people's pocket where they can spend it as they need to make their life better. Yes they may smartly save some but I think most of it would get back in the economy faster.  If that money was in our pocket and the banks, car companies failed, I think we would all be in better shape. No sense in saving businesses that can't survive the market.

David

[redcliffsw]

It sounds like you are saying that the Fed income tax ought to be eliminated.
Makes a lot of sense as we never had it before the early 1900's and that
would go a long ways toward getting the country on track again.

[dnalexander]

It sounds like you are saying that the Fed income tax ought to be eliminated.
Makes a lot of sense as we never had it before the early 1900's and that
would go a long ways toward getting the country on track again.

Red, I do think it should be eliminated. Government should be smaller and paid for by a flat tax. Leave the money in our pocket. For every hand that touches it the administrative costs only diminishes its value. Unfortunately, that is not how the system works now. So in the meant time I am in favor of the people taking every tax advantage they can by law to get the rebate due to them. I am not very confident that we can change the rules of the game in my lifetime. Doesn't mean I won't stop trying.

David

David

[redcliffsw]

Yes, but eliminating the current income tax to create a flat tax
would not gain a thing.  A flat tax would give the Fed's more income
and the means to increase the tax to increase their income stream.
That's more gov't power to spend & create programs and that's not good.

The 16th amendment ought to be repealed.  Do you think that the
"socialists" would go for that!

[dnalexander]

Yes, but eliminating the current income tax to create a flat tax
would not gain a thing.  A flat tax would give the Fed's more income
and the means to increase the tax to increase their income stream.
That's more gov't power to spend & create programs and that's not good.

The 16th amendment ought to be repealed.  Do you think that the
"socialists" would go for that!

I get what you are saying and their are problems with all taxation systems. Just transitioning from the current system to a radically different system would create some big problems. I am interested and open to all ideas. My goal would be to have a system where everyone pays some tax, a simplified code and reduced IRS bureaucracy. I just can't understand how sending money to the government then have them dole it back to our pockets makes sense. All that accomplishes is to eat up the money through administrative costs.  Also, not a tax issue, overall spending should be reduced and just plain waste curtailed. What do you think should be done to fund our government(s) (National down to cities). I would love to hear your opinion. I realize that full explanation could take a lot of space. Maybe just some highlights of your ideas.

David