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March 14, 2010

Has the Recovery Act stimulated the Valley?

Opinions vary on whether stimulus funds have been a success in Terre Haute

Arthur Foulkes The Tribune-Star

TERRE HAUTE — Millions of dollars in federal “stimulus” dollars have made their way to Terre Haute and Vigo County since the American Recovery and Reinvestment Act of 2009 was signed by President Obama 13 months ago.

Now the question is, what effect is the money having and is it truly a “stimulus” to the local economy?

“Are you stimulated yet?” asked Rose-Hulman associate economics professor Kevin Christ in an article published in early 2008 during the George W. Bush presidency. Bush had just pushed through Congress a $145 billion “economic stimulus” package designed to prevent a possible recession.

At the time, Christ was skeptical that Bush’s stimulus would work. In hindsight, he said, figures show consumer spending may have increased slightly due to the Bush stimulus, but even that is in doubt.

Today, however, Christ believes the much larger President Barack Obama “stimulus package” is having a positive effect. Apart from the size difference in the two packages, Christ believes the Obama stimulus was far more necessary. In fact, the $787 billion Obama stimulus package probably should have been called an economic “resuscitation” package, he said.

“The collapse in economic activity in late 2008 was pretty dramatic by historical standards,” Christ said. This collapse created “slack” in the economy – unused labor and other resources. “What the government is trying to do [with the stimulus package] is to get people to take up some of that slack,” he said.

Is it working?

The answer to whether the stimulus spending is actually helping the economy depends on whom you ask. Christ, for one, believes it is working.

“We would be well into the third year of a recession” without the stimulus, he said. In fact, Christ believes the recession, which officially started in December 2007, is now actually over.

To support his view, Christ cites a recent report from the non-partisan Congressional Budget Office. According to the CBO, the economy, as measured by Gross Domestic Product, or GDP, grew at a robust 5.9 percent in the last quarter of 2009. Without the stimulus, GDP would have grown by as little as 2.4 percent or as much as 4.9 percent, the CBO estimates. The CBO also estimates the national unemployment rate – now about 9.7 percent – would be even higher without the stimulus spending. Without the stimulus, the percentage of workers unable to find jobs would have been well over 10 percent, the CBO reports.

The stimulus package is designed to take some of the pain out of a recession, Christ explained. The cost of doing this comes in “the future,” when the government has to start paying back the additional debt the stimulus causes, he said. But, the idea is to reduce some of the present pain by “taking the peaks” off of the good times in the future. That’s an idea Christ can support, he said.

Public sector growth

Another economist, professor Bob Guell of Indiana State University, is a little less optimistic about the effects of the Obama stimulus spending. While the spending has caused economic growth in the public sector, it has likely been a bit of a drain on the private sector, he said.

In calculating the net benefits of the stimulus “you have to be aware of the many jobs that are being lost in the private sector because of people anticipating a tax increase” to pay for the current government spending, Guell said. “It’s private spending that is crowded out.”

On the plus side, Guell noted, without the stimulus package, state governments would have had to make much deeper cuts in their spending, particularly for schools and universities.

Overall, Guell believes the net effect of the stimulus package on the economy is probably “slightly positive,” he said. And, like Christ, Guell believes the recession, by traditional measures, is over.

Vigo County’s stimulus

Several different private and government organizations in Vigo County have been awarded millions of dollars in stimulus funds in the past year.

For example, according to the federal government’s stimulus-tracking Web site, www.recovery.gov, Indiana State University, Rose-Hulman Institute of Technology, Hamilton Center and the Western Indiana Community Action Agency all have been awarded tens of thousands of stimulus dollars each.

Government entities are by far the largest recipients of stimulus funds. For example, the Vigo County School Corp. Title 1 program is receiving $3.2 million, while Covered Bridge Special Education District will receive $4.7 million on behalf of its four member school districts, including Vigo.

 The Terre Haute Police Department was awarded $1.4 million and the Terre Haute International Airport Authority has been awarded $2.7 million.

That funding has allowed the city and county to pay for projects they might otherwise have been unable to afford, said Terre Haute Mayor Duke Bennett. For example, stimulus funding allowed the city to purchase six new buses for the Transit Department, Bennett said. It also has allowed the city to purchase new LED traffic lights, which will save about $280,000 annually in electrical bills, the mayor said.

“The local taxpayer will benefit from that,” Bennett said.

Better return on investment

But has the stimulus funding been a real boost for the local economy?

“It all depends on which set of glasses you look through,” Bennett said. On the one hand, the funds made some projects possible that otherwise could not have been afforded. On the other hand, Bennett believes, the city could have gotten more benefit if allowed more control over how the money was spent.

Only the $1.52 million Brown Boulevard extension project was “shovel ready” when the stimulus funds were awarded, Bennett said. This meant Brown Boulevard was awarded funding while other projects, such as upgrading East Margaret Avenue, were not. Bennett believes East Margaret Avenue, which is seeing more current economic development, might have provided a “better return on investment” than Brown Boulevard, he said.

“I don’t think the stimulus did what [the federal government] thought it would do,” Bennett said. While it is allowing some projects to move forward and will save some taxpayer dollars, “it really didn’t stimulate the economy. I think it was worth it, but it wasn’t really a stimulus. It was just the federal government doling out some money.”

Critics not hard to find

With national unemployment near 10 percent, some critics are saying the stimulus package hasn’t worked. But the solutions these critics offer are very different.

With one perspective, Princeton University economist and Nobel Prize winner Paul Krugman, argues the stimulus package is not delivering all that was promised because it was simply too small. Writing in the New York Times last July, Krugman stated that “policy makers should stay calm in the face of disappointing early results… But they should also be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough.”

With another view, Harvard University economist Robert Barro argues that the stimulus package simply will not work because government spending eventually “crowds out” a greater amount of private spending. In a February Wall Street Journal article, Barro wrote that a fiscal stimulus package of $600 billion would cause a $900 billion reduction in private spending. “This is a bad deal,” he wrote.

Radically different views

While disagreeing over the effectiveness of stimulus packages in theory, most economists believe that spending, either by consumers, government or investors, is a way out of a recession.

One economic school of thought, however, disagrees even with this. Scholars with the Austrian School of economics believe recessions are not caused by too little consumer and investor spending, but rather too little saving. If they are right, the stimulus package is probably sowing the seeds of future economic trouble.

Representing this school, Pepperdine University economist George Reisman wrote last year that stimulus packages do nothing to promote long-term economic growth because they discourage savings. And savings, he writes, are essential for an economic system to maintain the productive capital necessary to provide new goods and services as well as new jobs.

“The fact is that most spending in the economic system rests on a foundation of saving,” Reisman wrote for www.mises.org. “Recessions and depressions and the losses that accompany them are the result of the attempt to create capital on a foundation of credit expansion rather than saving. Credit expansion is the lending out of new and additional money that is created out of thin air by the banking system… The money so created and lent has the appearance of being new and additional capital, but it is not.”

Much more to come

While many people say the stimulus has failed to deliver as promised, supporters note that much of the money is yet to be spent.

As of February, only about one-third of the $787 billion had been spent, according to the Wall Street Journal. Most of the first-year spending went to government programs. Most infrastructure projects, such as Terre Haute’s Brown Boulevard extension, are not set to begin until this year.

Additionally, there remain $195 billion in stimulus tax cuts that have yet to take effect, the Journal reported.

Still, some economists, such as Guell and Christ, believe there also remain some important problems or potential problems to tackle in the wake of the stimulus package. Both believe the ratio of national debt to GDP is currently too high. And Christ worries that inflation could become a problem in the long run, he said.

And the question still lingers of whether the stimulus can do what it is advertised to do — restore private economic growth.

Ideally, the stimulus package should be “jump starting” private economic activity, Guell noted. “Kind of like lighting a fuse and watching things go, or priming a syphon by sucking on a hose” to get water flowing.

“The whole idea of that is to not have to continuously suck on the hose or spend the government money,” Guell said. “It doesn’t always work that way.”

Arthur Foulkes can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.

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