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Is the Stimulus Working?

The recession began during the last quarter of 2007 and the gross domestic product fell by 2.8%. There was a slight rebound during the first quarter of 2008, but during the rest of the year, the direction was all down.  Consumer demand was off and prices declined.  The latter was a sure sign of the rather scary economic phenomena known as deflation.  
And most worrisome, foreclosures and bankruptcies reached levels not seen since the great depression.  Also, to add to the confusion, the banking system, with its faltering mortgage backed securities, seemed on the verge of collapse.  Sometimes, even a few months later, it’s easy to forget how bad things had gotten.  

 

 

The government involvement that followed was massive.  During the closing days of the Bush Administration, with enthusiastic Congressional support, there was the Troubled Asset Relief Program.  TARP, as it’s known, provided emergency government lending to banks, all heavy with bad debt that seemed on the edge of collapse.  
The program cost Americans over $700 billion.  For the most part, as we pass into the second half of 2009, the banking system seems stable and there are even signs of increased lending.  However, the banking crisis might not be entirely over.  The banks still have a lot of bad debt.  And just how they’re going to get rid of it is still a big question mark.  But for the moment at least TARP seems to have staved off a full scale meltdown.
When Barack Obama came to the White House, his administration not only continued with the TARP program, it also introduced the stimulus package.
 The stimulus, which is costing some $787 billion, is still in its early stages.  But there are signs that it might be working.  The surest indicator that the economy could be improving came with the release of the second quarter gross domestic product data.  It was down, but the drop was significantly lower than expected.  In the first quarter, GDP fell by more than six percent.  This was grim.  However, during the second quarter, which was just reported, it was off by a much less dramatic one percent annual rate.  And what’s more, there is some speculation, that in the third quarter the economy may expand instead of contract.  This doesn’t mean the recession is over, but it’s a good sign.
However, just what effect the stimulus has had is still an open topic.  It probably hasn’t hurt.  The promised investment has likely encouraged growth in the economy, but not enough federal money has made it into the system yet to really fuel a full scale recovery.  
That’s yet to come. The recovery, as many have noted, seems to be one characterized heavily by relatively few new jobs and that’s where the stimulus package will likely make the most difference.
This is where the President’ stimulus package might have the most significant impact.  The program focuses heavily on projects that create jobs.  This includes new highways, transportation upgrades, and bridges.  It also includes investment in new green industries.  However, in both cases, and this is especially true for the big ticket items like bridges, it takes a little while before anyone starts hiring.  The same is true for the investments in green energy.  The expectation is that many of these jobs, several hundred thousand, or so goes the hope, will be opening by the end of the year.  This could make a big difference.
Unemployment is currently running at 9.5%.  That’s almost, but not quite a post World War II record.  The expectation is that it will reach 10%.  So, while the overall economic indicators, such as gross domestic product, sales, and consumer lending start to look better, there are still a lot of people out of work.  And this has its own set of consequences.  For much of the recession home foreclosures were fueled by bad loans and subprime lending.  Now, the cause has shifted to the financial distress that follows the loss of a job. This opens up another worry.  Unemployment, if it gets worse or doesn’t improve, could well force us back into a decline.  This is where the stimulus, pricey as it might be, might be just what the economy needs if it’s actually to start and sustain a recovery.   
You may reach David Kerr at This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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