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SCHILLER: The anatomy of (stimulus) failure

Obama’s plan wasn’t a mistake, it was a hoax from the beginning

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It was the economy that drove the Democrats out and a Republican majority in. Specifically, it was the failure of President Obama's "stimulus" package to stimulate the economy enough to bring the unemployment rate down. Now a lame-duck 111th Congress is going to have to decide what to do. The Republican-led 112th Congress will confront the same questions when it convenes in January. Before making more decisions about economic stimulus, we should be absolutely clear why the huge stimulus program failed.

Failure in this context doesn't mean that the stimulus program didn't create any jobs. That's a silly proposition. Every student who completes Economics 101 knows that an increase in government spending or a cut in taxes will give the economy a short-run shot in the arm. The failure of the Obama package was that the actual demand stimulus was absurdly small in relation to the amount of money ($827 billion) spent. Spending even more money in the same way, as many liberals advocated, only would have added to that failure. The failure resulted not from a shortage of money, but from two fundamental flaws in the program's design.

The first flaw was the choice of policy levers. Fiscal stimulus can be generated from either increases in government spending or tax cuts. From the outset, Mr. Obama was adamant about his preferences. He characterized the tax-cut option as the "tired dogma of the past" and emphasized the need to hitch short-run stimulus onto long-term investments in infrastructure and energy independence.

Whatever the merits of such long-term investments, Mr. Obama was dead wrong about the efficacy of tax cuts. One need look back no further than 2008. The $100 billion in tax rebates was spent quickly by consumers. In the process, the negative growth in gross domestic product of the first calendar quarter was reversed in the second quarter. The tax rebates did the job of stimulating short-term growth, and did it quickly. The ideologues advising Mr. Obama ignored this evidence, relying instead on surveys of consumer intentions.

When asked what they will do with a tax rebate, consumers piously respond that they'll save it or pay off credit card debt. In truth, those responses are no more reliable than New Year's resolutions to exercise more, eat more healthfully, quit smoking and spend more time with the family. Psychiatrists might have reason to examine such proclamations; economists focus on actual behavior. Not only do tax rebates get spent quickly, but even liberals should appreciate the egalitarianism of giving everyone the same-sized rebate. Mr. Obama's first failure was to reject this fiscal-stimulus option.

Mr. Obama's second mistake was to ignore the timing of his preferred policy option. He spoke repeatedly about the vast number of "shovel-ready" government projects that would put people to work quickly. In reality, there is no such thing as a "shovel-ready" government project. In fact, it's against the law.

The government procurement process is bound by strict rules and procedures. If Congress appropriates $50 billion for Department of Transportation (DOT) infrastructure projects today, DOT can't start building highways tomorrow. The department must first prepare a solicitation document (Request for Proposals or RFP) that details the scope of work desired. The development and in-house approval of that solicitation typically takes four to six months. Once the RFP is published in the Federal Register, the bidding process can begin. For infrastructure projects, the bidding time frame usually stretches out over six months. Once the bidding closes, DOT bureaucrats must review all the bids and select a winner. That review process lasts three to six months. Then the losing bidders can protest the award, forcing a second review. If you're keeping track, the procurement process has dragged on for about 1 1/2 years, and not a penny has been spent. So much for the short-term job-creation potential of "shovel-ready" projects.

Then there are those environmental concerns. No federal shovel can hit the ground without an environmental impact assessment. That can drag on for months. If environmental groups file suit, the procurement process drags on still longer. It can easily take two years from the time Congress appropriates infrastructure money until any of it gets spent. As of Oct. 1, DOT acknowledged that just 41 percent of its stimulus appropriation had been spent.

Mr. Obama swept aside all of these procurement hurdles when he proclaimed in January 2009 that his stimulus programs would create millions of jobs and keep the national unemployment rate, which was then 7.6 percent, under 8 percent. But ignoring the time lags in the government procurement process doesn't make them go away. By pretending they didn't exist, Mr. Obama was perpetrating a hoax that created unattainable expectations. The Democrats paid dearly for that hoax in this election.

Ironically, Mr. Obama tried to rally pre-election support by pushing a second stimulus program of roughly $50 billion. If DOT hasn't yet spent the first chunk of cash, what is the purpose of adding to that pile of unspent appropriations? Because a second stimulus package is subject to the same institutional delays as the first, how could it possibly help create more jobs in the short run? As they say, you can fool me once. But twice with the same hoax?

Now the lame-duck Congress must decide what to do next. Extending all of the George W. Bush tax-rate cuts is a no-brainer. But that won't create any new jobs; it will just avoid job destruction. If the goal is short-term job creation, Congress should revisit the tax-rebate option. If a chunk of the unspent appropriations of Mr. Obama's first and second stimulus programs were converted into tax rebates, consumers would jump-start the economy with another spending spree. That would be a real fiscal stimulus success.

Brad Schiller is an economics professor at the University of Nevada at Reno and author of "The Economy Today" (McGraw-Hill, 2010).

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