Obama Stimulus May Have Gotten It Right After All

Over the last few days, the media gave a superficial glance a a Congressional Budget Office (CBO) 2Q2011 quarterly report on the effects of the American Recovery and Reinvestment Act (ARRA) – and rightly so as this report was in essence a photocopy of past reports.

Many refer to this ARRA as the Obama stimulus.

In 2Q2011, the effects of the stimulus on GDP  was an uplift guesstimate between 0.8% and 2.5%.  With 2Q2011 GDP at 1.0%, the implications are that the economy without the stimulus should have been negative.  

Many noted Economists have argued that the stimulus was too small to ignite the economy.  As only 1/3 of the ARRA was really an attempt at stimulus ( the other 1/3 was social safety net and the remaining 1/3 was re-funding other social programs cut under Bush) – there might be some justification for this argument.

However, with an economy with a massive amount of slack (unemployment, excess capacity to produce) caused by the New Normal (demographic shift) – it is also likely true that any form of stimulus would have been absorbed by the economy without stimulating new growth.

But this is rear view mirror stuff – where are we headed?  Here again I go to the CBO who are the experts for potential GDP.   One of the foundation documents for the ARRA contained the following graph.

The inference from the above chart is that the economy would be back to baseline potential GDP by 2015.  Between 1990 and 2007, potential GDP was around 5%.  Current CBO Potential GDP projections are only 3.8% in 2015, peaks in 2018 at 4.7%, and then begins a decline towards 4% in the 2020’s.

The graph above measures the year-over-year change in GDP to the year-over-year change in potential GDP.  From 1Q2010 to 2Q2011, the stimulus caused the economy to operate above potential based on the CBO stimulus effect data.  Now as the stimulus effect is waning, 2Q2011 GDP and Potential GDP are crossing.

GDP trend lines show the economy is gravitating towards zero growth – and although the autopsy has not began, it is becoming clear that the stimulus did not provide the seeds necessary to reignite the economy.

This is not an opinion article, so I will not bombard readers with unsupportable hypothetical solutions thrown around in the media.  As we Trekkie’s know, there are “no win” scenarios where all you can do is mitigate effects.

If this is a “no win” scenario, then 2/3rd’s of the Obama stimulus definitely was targeted to mitigate the Great Recession and the ensuing Ungreat Recovery.  And sarcastically speaking, it is seldom government spending gets 2/3rds right.