How's that $787 billion stimulus plan working out?
One of President Obama's accomplishments during his first 100 days was the passage of a $787 billion stimulus plan. I think the idea of economic stimulus makes sense when an economy is in the middle of a deflationary spiral. As I posted, that's when a drop in demand leads to excess productive capacity, causing companies to cut prices and fire workers, which further lowers demand as more workers -- whose consumer spending accounts for 70 percent of GDP growth -- have less to spend.
So far, only about 10 percent of the stimulus money has been doled out and it's not having much effect in counteracting this deflationary spiral. How so? First quarter GDP plunged 6.1 percent -- compared to a 6.3 percent decline in 2008's fourth quarter -- and the preliminary numbers are usually adjusted downward. The unemployment rate is expected to hit 8.9 percent in April from 8.5 percent in March.
Two prominent observers offer a mixed verdict on the $787 stimulus plan. Warren Buffett sees no sign of bounce in housing or retailing, but Paul Volcker sees an economy that is bottoming out and not in need of a second stimulus package. Since money started going out during the second week in March only 9.5 percent or $74.9 billion of the $787 billion has been paid out.
And it's hard to see how the money spent so far will stimulate the economy. For example, during the last week of April $15.4 billion of the $787 billion was distributed of which $14 billion (91 percent) went to the Department of Health and Human Services (HHS), which in turn passed that cash on to the states to pay for Medicaid. It's hard to see how those Medicaid payments will create new jobs though.
I'd rather see money going to programs like the Chinese government's stimulus plan which, in part, gave $2.9 billion for a 13 percent purchase price subsidy on Liquid Crystal Display (LCD) TVs for its rural citizens -- which as I discussed on MarketPlace this week -- boosted demand enough to force Corning (GLW) to hire back 100 of the North Carolina LCD plant workers it had laid off. To be fair, the U.S. stimulus package has the potential to achieve similar benefits.
But so far, it looks like the only stimulus plan that's creating U.S. jobs right now is Chinese. And when you consider that China owned $744 billion worth of U.S. Treasury debt (topping all other countries at 23.5 percent of the total as of February 2009), it suggests that we have an opportunity to do an even better job of becoming economically self-sufficient.
So I'd give Obama an incomplete on his stimulus package -- but at the rate that the money has been going out it looks like it won't be completely spent for another 18 months. Nevertheless, I am hoping that the early stimulus spending will start to create U.S. jobs soon.
Finally, to show how that hope is turning into reality, I'd advise Obama to spend time each week talking about the new jobs that the stimulus spending creates.
Peter Cohan is president of Peter S. Cohan & Associates. He also