The Stimulus So Far

New York City--This past weekend, Vice President Biden made news when he said that the economy was probably in worse shape at the beginning of the year than anyone thought.  Although he told George Stephanopoulos that it is premature to speak of a second stimulus, the implication of his remarks is that more economic aid may be needed.  Indeed, Democratic-leaning economists such as Paul Krugman and Laura Tyson have floated the idea of a second stimulus.  Meanwhile on the other side of the aisle, Republicans are already campaigning against a second stimulus.  What is driving the talk of a second stimulus is the poor jobs number last month that suggested the green shoots are turning brown.  This, therefore, may be an appropriate moment to look at what has happened to the first stimulus.  Is it working?  If not, is another one needed?  Is anything impeding the flow of funds.  Alternatively, should policymakers be looking elsewhere for more economic fuel.

During the initial debate over the stimulus, I argued on behalf of a board--an idea first suggested by Dick Ravitch, former head of the New York MTA--to accelerate infrastructure spending.  We did get a board but its focus is to track the stimulus not carry it out and a website, that President Obama said would provide unprecedented transparency regarding the stimulus.  Here is my take on the stimulus so far.

First, the website and accounting surrounding the recovery package really does provide unprecedented transparency for a large government initiative, even allowing readers to comment on and discuss recovery projects.  The good news is this allows us to debate the stimulus on the basis of thorough data.  The bad news, however, is that six months into the Administration, the data show that only about $65 billion worth of projects have been started, or about 8% of the total two year budget.  A far smaller amount of money has probably been actually dispensed.  As I anticipated, the strategy of moving the money through the normal bureaucratic channels as opposed to an emergency board has slowed its disbursement and therefore moderated its stimulative effect.  On the other hand, using existing channels provides a degree of oversight.  In the inevitable tradeoff between speed and oversight, implementation of the the recovery package has erred on the side of oversight.

In many ways the most interesting portion of the stimulus--the part I first proposed last year--was that directed to clean energy.  The success of these funds in stimulating clean energy innovation is important to America's future, but for the most part, it is too early to measure their effect.  DOE recently announced procedures for giving out the approximately $4 billion in smart grid funds.  However, companies have been hampered in applying pending agreement on smart grid standards.  The Administration is doing everything right in this respect, spearheading a drive to accelerate the development of open standards.  However, this money, therefore, has yet to be spent. 

As another indicator of the development of renewable energy, the price of photovoltaic panels has dropped this year.  The rate of decline about 1% per month, however, cannot be attributed with certainty to any one factor and probably is more related to Spanish policy than what we have done in the United States.

Around the country, work is beginning on numerous infrastructure projects.  However, the normal delay in government contracting--even for "shovel ready" projects means that the bulk of stimulus funds remain to be spent.  In contrast, as the New York Times reports today, the French have been much more successful in rapidly deploying stimulus funds.  However, they are able to do this, in part, due to their more centralized governmental structure.

In its first months in power, the Administration framed its policy response to the economic crisis as consisting of three key initiatives: first, pass a recovery package to stimulate demand, second stabilize financial markets to leverage financial activity around that demand and finally, address the mortgage crisis.  This framing was in my view correct.

So how are we doing on each?  The first policy response, the recovery package to spur demand and create a multiplier effect is underway but money is entering the economy slowly so that we won't really feel it until the end of the year.  There is a silver lining to this timing.  It will hit at about the time that some are afraid we may be approaching a double dip.  However, the slow pace will keep us on tenterhooks well into the fall.  The rescue package for the banks has been reworked a number of times, but the fact that the large banks have been making profits and that some have repaid their loans from the TARP indicates progress has been made on this front--most due to the effect of reversing the mark-to-market rules that were forcing massive market-roiling markdowns of illiquid securities--and the high tailwinds for the industry provided by low cost money from the Fed.  Finally, the mortgage industry remains largely as it was in February with the combination of initiatives suggested by an interagency taskforce yet to really take effect.  People are still losing their homes to foreclosure.

So does this mean we need a second stimulus?  On the contrary, it means that as of now the stimulus funds have yet to really hit the economy and talk of a second stimulus is, as the Vice President stated, premature.  What would be more useful is to try to accelerate the spending of the funds already allocated.  Much progress has been made on banking.  More should be done to reduce the cost of mortgages and keep people in their homes.

While retrofitting buildings is leading to some new green jobs, clean energy which I believe must be an important driver of future growth has yet to impact the economy in a major way.  To fulfill the President's goals, it is time to think seriously about roadblocks to the development and uptake of new technologies in the energy sector as well as the deployment of renewable energy.  The American Clean Energy and Security Act recently passed by the House and now slated for consideration in the Senate provides some incentives to modernize our electricity grid.  Key to the process is opening up the close-knit industry to innovation.  One of the subjects we are researching most aggressively at NDN is how to remove roadblocks in the energy industry that block innovation, open markets to new players and technologies and unlock the full economic potential of the energy network. 

In short, as I argued last year, how recovery money is spent and how quickly it is spent--not whether we do a "second" stimulus--will ultimately determine the speed of recovery.