The Obama administration’s $787 billion economic stimulus package was supposed to keep the U.S. unemployment rate from soaring toward 10 percent this year. It failed.
Its predecessor, the $168 billion stimulus bill passed last year under President George W. Bush, was meant to keep the country out of recession in the first place. Not only did that package likewise fail, it was dead on arrival. Once all the data were available, economists determined that the country had been in a recession since late 2007.
They just don’t make stimulus bills the way they used to. But, in the end, all the various stimulus packages may not affect very much, except for the federal debt we keep piling up as politicians try to curry favor with voters.
The most effective stimulus bill of my lifetime was the Economic Recovery Tax Act of 1981 (ERTA), which was passed in the early months of the Reagan administration and took effect the following year. Unlike the 2008 and 2009 legislation, that law did not send government checks to millions of people, forward large chunks of cash to state and local governments, or make small changes in withholding tables to provide “middle class” tax relief. Most memorably, the 1982 law cut the top federal income tax rate from 70% to 50%, but that, of course, only helps taxpayers in the top income brackets. What was more important was that the law created incentives for private-sector investment, particularly by changing depreciation rules in the tax code.
A developer who opened a new office building in 1980 had to write off the cost over 30 to 40 years. That same building, opened in 1982, could be written off in just 15 years. Similarly accelerated depreciation was made available for all sorts of other equipment, including personal computers, whose sales were just taking off after the 1981 introduction of the IBM PC. These write-offs gave businesses a major incentive to invest in new facilities, all of which had to be built, sold, installed and operated, creating new job opportunities.
In early 1982 the country was in the grip of a vicious “double-dip” recession that sent the unemployment rate above 10 percent, a benchmark we are likely to reach later this year for the first time since that downturn. The economy turned around quickly after the new tax laws took hold that year. The stock market, which had been stagnant since the 1960s, took off on a climb that lasted until the end of the century. Unemployment fell even though the Federal Reserve kept interest rates sky-high in its attempt to curb inflation.
So ERTA did indeed spark an economic recovery. But it came at a price. Tax cuts combined with a major military buildup to send federal deficits—and the national debt— soaring. The dollar’s exchange rate see-sawed, and the nation locked itself into an age of permanent trade deficits. Japan, which was the China of that era, enjoyed a huge financial bubble as it sold goods to the United States, only to collapse at the end of the 1980s into a stagnation that continues today.
Worst of all, the American economic recovery led to a real estate bubble not unlike the one we just experienced. Home prices rose and then crashed. Office buildings were completed but then stood empty. The savings and loan crisis foreshadowed last year’s financial market meltdown and helped bring on a new recession in 1991.
And that, ultimately, illustrates the problem with economic stimulus programs. If they are targeted poorly, like the 2008 and 2009 packages, they just don’t work. If they do happen to work, as in 1982, they mostly shift demand for goods and services from the future to the present—leading to another downturn in the future.
Think of the big sales incentives carmakers used for years to keep their factories humming. With big cash-back offers, sweetheart leases and interest-free financing, car makers kept the metal moving. Americans reliably bought 16 million cars each year through most of this decade. But, in the end, there are only so many drivers, so many parking spaces, and so much household money available to pay for gas and insurance. Used-car prices crashed when the old leases expired, and new-car sales will struggle to reach 10 million units this year.
Sending big checks to households doesn’t work, as we saw last year. Overextended consumers will just put the money in the bank, and any extra spending trails off once the cash windfall runs out. Making small cuts in payroll withholding, as the 2009 legislation did, does not work either. People are not as stupid as Congress and the Obama economic team seem to assume. They can save small amounts of money as easily as large amounts.
Stimulating private investment, as ERTA did, can help in the short term but is really just a way of borrowing future demand to benefit the present.
That leaves two options. One is to avoid any “stimulus” spending by the government and simply make money freely available if and when businesses and consumers are ready to use it. The Federal Reserve already is doing this through near-zero interest rate targets and efforts to support the banking system.
The other option is to directly manipulate unemployment by having the federal government hire a vast temporary work force. Recall Franklin Roosevelt’s programs, such as the Civilian Conservation Corps, in the 1930s. This can put large numbers of unemployed people back to work, and it might leave the country with a legacy of worthwhile projects that get done. But it adds to the federal debt, which already is soaring, and sooner or later these workers must return to the private sector or we end up with a bloated, unproductive government. Roosevelt needed World War II to create enough labor demand to successfully unwind his government employment efforts. We would not want to count on a World War III to bail us out.
So, as unemployment climbs through the 9.5% level on its way to 10% or more, the Obama administration is pondering whether to propose yet another stimulus package at the end of the summer. Don’t get your hopes up that it will work.
Posted by Larry M. Elkin, CPA, CFP®
The Obama administration’s $787 billion economic stimulus package was supposed to keep the U.S. unemployment rate from soaring toward 10 percent this year. It failed.
Its predecessor, the $168 billion stimulus bill passed last year under President George W. Bush, was meant to keep the country out of recession in the first place. Not only did that package likewise fail, it was dead on arrival. Once all the data were available, economists determined that the country had been in a recession since late 2007.
They just don’t make stimulus bills the way they used to. But, in the end, all the various stimulus packages may not affect very much, except for the federal debt we keep piling up as politicians try to curry favor with voters.
The most effective stimulus bill of my lifetime was the Economic Recovery Tax Act of 1981 (ERTA), which was passed in the early months of the Reagan administration and took effect the following year. Unlike the 2008 and 2009 legislation, that law did not send government checks to millions of people, forward large chunks of cash to state and local governments, or make small changes in withholding tables to provide “middle class” tax relief. Most memorably, the 1982 law cut the top federal income tax rate from 70% to 50%, but that, of course, only helps taxpayers in the top income brackets. What was more important was that the law created incentives for private-sector investment, particularly by changing depreciation rules in the tax code.
A developer who opened a new office building in 1980 had to write off the cost over 30 to 40 years. That same building, opened in 1982, could be written off in just 15 years. Similarly accelerated depreciation was made available for all sorts of other equipment, including personal computers, whose sales were just taking off after the 1981 introduction of the IBM PC. These write-offs gave businesses a major incentive to invest in new facilities, all of which had to be built, sold, installed and operated, creating new job opportunities.
In early 1982 the country was in the grip of a vicious “double-dip” recession that sent the unemployment rate above 10 percent, a benchmark we are likely to reach later this year for the first time since that downturn. The economy turned around quickly after the new tax laws took hold that year. The stock market, which had been stagnant since the 1960s, took off on a climb that lasted until the end of the century. Unemployment fell even though the Federal Reserve kept interest rates sky-high in its attempt to curb inflation.
So ERTA did indeed spark an economic recovery. But it came at a price. Tax cuts combined with a major military buildup to send federal deficits—and the national debt— soaring. The dollar’s exchange rate see-sawed, and the nation locked itself into an age of permanent trade deficits. Japan, which was the China of that era, enjoyed a huge financial bubble as it sold goods to the United States, only to collapse at the end of the 1980s into a stagnation that continues today.
Worst of all, the American economic recovery led to a real estate bubble not unlike the one we just experienced. Home prices rose and then crashed. Office buildings were completed but then stood empty. The savings and loan crisis foreshadowed last year’s financial market meltdown and helped bring on a new recession in 1991.
And that, ultimately, illustrates the problem with economic stimulus programs. If they are targeted poorly, like the 2008 and 2009 packages, they just don’t work. If they do happen to work, as in 1982, they mostly shift demand for goods and services from the future to the present—leading to another downturn in the future.
Think of the big sales incentives carmakers used for years to keep their factories humming. With big cash-back offers, sweetheart leases and interest-free financing, car makers kept the metal moving. Americans reliably bought 16 million cars each year through most of this decade. But, in the end, there are only so many drivers, so many parking spaces, and so much household money available to pay for gas and insurance. Used-car prices crashed when the old leases expired, and new-car sales will struggle to reach 10 million units this year.
Sending big checks to households doesn’t work, as we saw last year. Overextended consumers will just put the money in the bank, and any extra spending trails off once the cash windfall runs out. Making small cuts in payroll withholding, as the 2009 legislation did, does not work either. People are not as stupid as Congress and the Obama economic team seem to assume. They can save small amounts of money as easily as large amounts.
Stimulating private investment, as ERTA did, can help in the short term but is really just a way of borrowing future demand to benefit the present.
That leaves two options. One is to avoid any “stimulus” spending by the government and simply make money freely available if and when businesses and consumers are ready to use it. The Federal Reserve already is doing this through near-zero interest rate targets and efforts to support the banking system.
The other option is to directly manipulate unemployment by having the federal government hire a vast temporary work force. Recall Franklin Roosevelt’s programs, such as the Civilian Conservation Corps, in the 1930s. This can put large numbers of unemployed people back to work, and it might leave the country with a legacy of worthwhile projects that get done. But it adds to the federal debt, which already is soaring, and sooner or later these workers must return to the private sector or we end up with a bloated, unproductive government. Roosevelt needed World War II to create enough labor demand to successfully unwind his government employment efforts. We would not want to count on a World War III to bail us out.
So, as unemployment climbs through the 9.5% level on its way to 10% or more, the Obama administration is pondering whether to propose yet another stimulus package at the end of the summer. Don’t get your hopes up that it will work.
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