Feldstein: Obama’s Stimulus Plan Slow to Trickle Through Economy


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. General Electric Co.’s second-quarter profit from continuing operations declined 47 percent, and revenue fell 17 percent, the company said in a statement today. GE, the world’s biggest maker of power-generation equipment and services, is targeting more than 400 stimulus projects valued at $200 billion worldwide, the Fairfield, Connecticut-based company’s chairman and chief executive officer, Jeffrey Immelt, said. While little has been realized so far this year, Immelt said he expects more in the second half.

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 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.

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 Crunch

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.”

To contact the reporters on this story: Matthew Benjamin in Washington at Mbenjamin2@bloomberg.netAlison Sider in Washington asider@bloomberg.net


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