With the economy showing signs of recovery, fiscally conservative economists and Republican lawmakers are suggesting that the large unspent portion of the nearly $800 billion stimulus fund should be redirected to slash this year’s nearly $2 trillion annual deficit.
Democratic lawmakers, Obama administration officials and many economists doubt the wisdom of truncating the stimulus program so soon after it began. But Republican congressmen and economists who were not thrilled with the stimulus effort are increasingly calling for it to be foreshortened as a return to economic growth appears closer at hand.
Administration accounting shows that relatively little of the stimulus funds that would directly create jobs have been spent. The White House says $112 billion from the stimulus account has been spent or obligated. In addition, much if not most of the economic recovery expenditures have been spent to pay for state assistance, unemployment and Medicaid benefits, and other safety net programs that would create few if any new jobs.
Nevertheless, there are increasing reports that key sectors of the economy are beginning to show modest signs of recovery.
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Construction spending is up slightly for the second straight month, factory orders rose 0.7 percent in April, existing home sales were up three months in a row, and banks have begun raising capital again and showing signs of growth. These and other economic signals have sparked a rally on Wall Street that has raised stock values by more than 30 percent since March.
No one suggests the economy is out of the woods. The unemployment rate, always the last economic figure to show improvement in the aftermath of recessions, continues to climb, rising from 8.9 percent in April to 9.4 percent in May — though the figure of 345,000 jobs lost last month was sharply below economic forecasts and marked the fourth straight month that the pace of layoffs has slowed.
That is one of the reasons why top economists such as Ben S. Bernanke, chairman of the Federal Reserve, see the pace of the nation’s economic contraction slowing and entering a recovery stage later this year. A survey of 45 economists by the National Association for Business Economics (NABE) Outlook reported late last month that the end of the recession is near.
“The good news is the NABE panel expects economic growth to turn positive in the second half of this year, with the pace of job losses narrowing sharply over the remainder of this year and employment turning up in early 2010,” NABE President Chris Varvares said. Nearly three out of four of the panel’s economists said they expected the recession would end by the third quarter.
But some economists think President Obama’s stimulus plan has had little if anything to do with the economy’s new signs of life, that a lot of the heavy lifting in the recovery is a result of actions taken by the Federal Reserve, and that once the recession ends, the remaining funds, estimated to be in the hundreds of billions of dollars next year, should be returned to the U.S. Treasury.
“The end of the recession is still months away, but it is increasingly clear the stimulus package was a serious mistake. To date, it has had no identifiable beneficial impact on the economy,” said Stanford University economist John Cogan.
“More important, its impact later this year and next will be decidedly negative because the funds required to finance the package’s spending will be drawn from private-sector resources that are needed to fuel the recovery. At this juncture, Congress would be wise to repeal the remainder of the program,” Mr. Cogan said.
On Capitol Hill, Sen. Jim DeMint, South Carolina Republican, told The Washington Times that he too thinks the recession could be coming to an end within months and he will push to bring the stimulus fund’s spending to a halt.
“If there is any way we can claw some of it back, it makes a whole lot more sense to reduce our debt than spending it as quickly as we can. We should stop spending it. There are [other] things we can do,” Mr. DeMint said. “It makes no sense to continue trying to push this money out through government sources and overtax our businesses, which are the ones creating the jobs.”
Democrats, however, argue that even though much of the stimulus is not aimed at boosting the economy in the near term, the stimulus program contains other funds important to long-term economic growth. And some do not put much stock in forecasts that the recession will end soon.
“I am not that optimistic about the recovery, so I think it would be risky to pull back the stimulus now,” said economist Alice Rivlin, who was President Clinton’s budget director and a former member of the Federal Reserve.
“Even if [the gross domestic product] stops falling, unemployment is likely to rise well into 2010. Recovery is likely to be long and slow,” Ms. Rivlin said.
“Moreover, part of the $800 billion wasn’t really temporary stimulus. That is why it is not spending out faster. It was investments in infrastructure, education, health information technology, etc., that we need to have a more productive economy in the longer run. The case for these investments isn’t affected by quick recovery, even if it happens,” she said.
Thomas E. Mann, a senior fellow in governance studies at the Brookings Institution, also remains doubtful of the economy’s early recovery and thinks talk of cutting the stimulus short to deal with the deficit is premature.
“When FDR followed that advice in 1937 and began to worry once again about the deficit, the economy plunged back into recession. It would not be prudent to assume the economy has recovered when virtually all signs indicate only that the rate of decline has slowed,” Mr. Mann said.
Outside of Mr. DeMint’s suggestion that Congress should not spend the rest of the stimulus money if the economy turns around, the idea at this point is being pushed by economists and budget analysts who question the effectiveness of the economic recovery act.
Brian Riedl, chief budget analyst at the Heritage Foundation, said that “if the purpose of the money is to end the recession, then once the recession ends, there will be no justification for not taking the money back. The entire purpose of the expenditures would have ceased to exist.”
Congressional Republicans, who did not support the stimulus to begin with, continue to rail against the stimulus package amid reports that some of the money has been lost to wasteful spending.
“We know some of this money is going to be wasted,” Vice President Joseph R. Biden Jr. told a group of business leaders in New York last week. “Some people are being scammed.”
In the meantime, the idea of giving back the money whenever feasible appears to be gaining support among House Republicans, a party spokesman said.
“House Republicans will be looking for any and every opportunity to repay the American taxpayers for the billions in wasteful stimulus spending regardless of when the economy makes a comeback,” said Mary Vought, press secretary to the House Republican Conference.
Meanwhile, Republican leaders were pounding the administration and the Democrats in the wake of the higher unemployment rate announced Friday, saying that it showed the spending stimulus has failed to create jobs.
House Minority Leader John A. Boehner, Ohio Republican, pointing to the rise in the jobless numbers, said Friday that the stimulus program “has not only loaded unprecedented debt onto our children and grandchildren, it also has failed to meet its most basic economic goals.”