Remember how urgent it was?

by Russ Roberts on May 31, 2009

in Stimulus

The stimulus package was signed into law February 17th with great urgency and fanfare. As of May 22, a total of $35.9 billion has been spent. In a $14 trillion economy, this is not much stimulus.

To see the total amount spent, go here and click on box number 3 in the main window at the top of the page. It's tricky. Right now the main window is about "Health Care in Indian Country" but at the bottom of the blue box, there is a "Learn More" option. Click on number 3.

At first, I assumed the weekly totals must not be cumulative. How could a cumulative number go down? Did they gtake some of the money back? Turns out there was a $8.9 billion "accounting adjustment." So the correct number that the government is reporting as of May 22 is $35.9 billion. That is the total spent out of the $787 billion. That's just under 5%.

I always thought the one thing the government was pretty good at was spending money. Maybe it is, but it's not good at doing it quickly.

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{ 39 comments }

Sam Grove May 31, 2009 at 11:29 am

It was a psychological operation to bolster consumer confidence without risking monetary inflation.

EX-GMU-Student May 31, 2009 at 11:52 am

Russel, the markets immediately reflect all available information. The passage and availablility of the stimulant funds lead to higher stock prices and availabilty of capital. It lead to easier access to money for companies, stablizing unemoplyment, improved consumer confidence, and higher international demand for American financial assets. How much money was spent is not important since the market has already taken that money into consideration.

It is astonishing for an economist teacher to miss the point.

Martin Brock May 31, 2009 at 11:57 am

Ex, You've missed a few episodes. The volume of money alone is not a very informative signal. Precisely how the money is spent signals far more information, and we don't have this signal until the money is spent. Even spending proposals enacted into law don't send this signal effectively, because these enactments only indicate the first of many hands through which the money passes.

TOF May 31, 2009 at 12:22 pm

There is a practical limit as to how quickly money can be spent on any goods and services. That is well known. From a technical perspective, the money is (apparently) "obligated," to use terminology from the federal budgeting process.

I suspect most in Congress, know little or nothing about how the obliations they authorized will actually be spent. Watch the Obama administration closely.

EX-GMU-Student May 31, 2009 at 1:49 pm

Martin,

You are decidedly wrong here. The markets will not wait until the money is spent before they calculate the impact of it. Markets will ALWAYS reflect the latest information that is available at the time the info becomes available. In this case, the investors have an expectation on how the money is spent and that is reflected in the result. If the money is spent differently than expected, the market will adjust to reflect the impact of the new information. That is why the markets are so sensitive to economic data that comes out.

K Ackermann May 31, 2009 at 2:07 pm

EX, how's your trading going?

Your transparent markets with their perfect information seem to be pushed around these days by very visible invisible hands.

Has your trading been on par with, say, Golden Sacks, who boasted 30+ days of over $100 million in profits during the last 3 months reporting, while their average capital at risk was $240 million. That's quite a hit rate, to be turning $240 million into $340 million in 6.5 hours.

They had 6 days of losses, but something makes me suspect that is for appearences.

Take a look at the last 20 minutes of trading from last Friday. Human traders are looking on in awe instead of placing trades these days.

It is astonishing for an economist teacher to miss the point.

It's astonishing the student still has not met the real world.

World, meet EX. EX, the world.

K Ackermann May 31, 2009 at 2:23 pm

Also, EX, have you considered the information the market receives?

Let me show you something interesting I discovered yesterday…

Here is a screenshot from Bloomberg that I made. I highlighted 2 headlines because I thought it was odd that of all the news out there, 2 of the headlines would be about lung cancer drugs.

Note the time in the upper-left corner.

While I was making the screenshot, Bloomberg updated my browser, and here is what it now showed. A THIRD headline of a different drug dealing with lung cancer, and only minutes apart.

Let me ask you: are they headlines, or are they advertisements?

Cheers May 31, 2009 at 2:48 pm

EX,

I will say this as a business and investment practitioner. Feelings mean nothing. Investments in no cases occur because of an expectation of an upturn, or because of an expectation of credit, or an expectation of a change in cyclical demand.

In business we have a very good understanding of demand, a reasonable understanding of the present nominal and real interest rates, and an incredible understanding of rhetoric versus reality.

We invest based on rate of return which takes demand inputs that are FAR more reliable than a theoretical upturn based on a stimulus. We understand that a person who talks in grandiose terms about a stimulus, green energy and no taxation is probably pulling it out of the ether.

If I tell you that tomorrow I'm donating 600 billion as a stimulus to you, you're not going to act based on that. You're not going to because you place a weighting on my statement that reflects your interpretation of what will really happen, and what the impact of that is.

You make 3 false assumptions.
1: the stimulus necessarily leads to "market" optimism
2: the optimism results in people expanding their present purchases despite the fact that overconsumption was the cause of the economic retraction
3: that the business world is reacting to this optimism in a way that causes them to ignore the real market indicators that exist.

LoneSnark May 31, 2009 at 4:00 pm

If the only impact of the stimulus was what it made investors believe to be the future, then would have presumably factored in the other impacts of the stimulus: a government sucking up all the available capital and a government strongly pressured to raise taxes as borrowing becomes difficult.

K Ackermann May 31, 2009 at 4:22 pm

Cheers, your 3rd point is extremely salient.

In terms of just the stock market, I could understand the rise if the market was predominantly composed of an opertunistic, but less than savvy public who just listened to the headlines.

Just looking at Friday's volume pattern, there is simply no chance that it was the average Joe trading the market.

What signals have caused the market to jump from 6500 to 8500 (DOW) in less than 3 months?

Certainly not real earnings, so is it expected earnings? It has to be, right?

So how far out are those signals being broadcast? Other than a few 2nd-order derivitives, I don't see any signs that the economy is poised for even a modest turnaround. What could possibly drive it besides credit expansion and a willingness and capacity to borrow and spend?

Oh, yeah… stimulus.

They are pouring gas into the carb, but the stupid gas tank is empty, the car is in a ditch, and nothing is open up ahead anyway.

We will ultimately be exporting our way out of this, but absolutely nothing is setting up for that.

The longer this goes on, the greater the chance for system shocks. System shocks suck.

The speculator in me wants to spread on the downside, but premiums are rediculous, and I don't trust individual stocks these days. That might leave me with inverse ETF's, but the volatility severely erodes them, and the market has been changing direction just about every day. This market slaughters, and that is why the 5-day chart on volume looks like a heart monitor. Nobody is trading except computers at the end of the day.

Somebody better know how to turn those things off, because they are going to have the markets in record territory if the economy gets any worse.

Martin Brock May 31, 2009 at 5:04 pm

You are decidedly wrong here.

You write "decidedly wrong" but don't dispute a word I've written.

The markets will not wait until the money is spent before they calculate the impact of it.

Again, markets have not reacted to the specific expenditures, because the specific expenditures haven't occurred. Markets will wait until the specific expenditures occur to incorporate this information, because they can't possibly do anything else.

Markets will ALWAYS reflect the latest information that is available at the time the info becomes available.

The specific expenditures are information that is not yet available.

In this case, the investors have an expectation on how the money is spent and that is reflected in the result.

This expectation is necessarily based on very incomplete information. When more complete information appears, this new information is reflected in the result.

If the money is spent differently than expected, the market will adjust to reflect the impact of the new information.

Of course. And the money certainly will be spent differently, because investors are not omniscient.

That is why the markets are so sensitive to economic data that comes out.

The specific expenditures are economic data that hasn't come out, and these details comprise most of the information relevant to the ultimate utility of the expenditures.

LowcountryJoe May 31, 2009 at 6:21 pm

EX-GMU-Student: if stimuloss was such a sucessful strategy to employ, then why not stimulate all the damned time?

Were you a student of Economics? If so, were you ever paying attention to the numerous times that the concept of tradeoffs and opportunity costs came up?

EX-GMU-Student May 31, 2009 at 7:48 pm

Thanks for playing guys. I didn't see anyone with a relevant argument against my statement.

K I never said the markets are transparent or that there is perfect infomation or that large financial companies don't have the ability to game the market. All that is well and good and I agree with but that is irrelevant to this discussion.

Cheers there is nothing in my statements that shows I made the assumptions that you list. But I will tell you this. Businesses DO invest if the ROI exceed the cost of capital so an increase in availability/decrease in cost of credit does stimulate business spending. Also, the expected stimulus spending does signal future demand. For instance, it is a fair assumption that a portion of the stimulus spending will go towards infrastructure improvements which in turn stimulates the construction sector. So if you are an executive in that segment you don't want to be sitting on low inventories in 3 months.

Martin everything I wrote was in dispute of what you had said. The fact that exact information is not available is not going to deter the market from making guesses/projections. Obama and his administration have given general statements about where the money will go and that information is already reflected in the market. If new information becomes available, the market will adjust its projections and correct itself.

My point, which nobody is addressing, was that the stimulant does not have to be spent before it affects the economy (positively or negatively, that is not the point). The stimulus plan started to affect the economy the moment it was discussed as a possibility, and it continued to do so as it went through the legislative process and started to become more and more likely to pass.

K for your info I quit trading and started investing once I realized I can not beat the market. As a small investor I can not compete with large financials which have very sophisticated models and access to priviledge information. The thing is by the time something hits a newswire it has already been reflected in the market and it is too late for me to act on. I go for a few industries that I know very well and I look for long term value. Have been doing great for 7 years now.

EX-GMU-Student May 31, 2009 at 8:05 pm

LowCountry wow, you definitely know you economics keywords…

But anyways, I never said the stimulus was successful. I think any objective person would have to wait and see what happens in the future before making a judgment.

jorod May 31, 2009 at 8:37 pm

Hopefully, they will spread the spending over 10 years.

Doug Stevens May 31, 2009 at 8:54 pm

The stimulus plan started to affect the economy the moment it was discussed as a possibility, and it continued to do so as it went through the legislative process and started to become more and more likely to pass.

Correlation does not imply causation. There were a lot of other things going on at the same time.

John Dewey May 31, 2009 at 10:12 pm

EX_GNU-Student: "It is astonishing for an economist teacher to miss the point."

EX-GMU-Student "I didn't see anyone with a relevant argument against my statement."

I am not surprised that someone who would make the first statement would also make the second one.

Your comments will be more readily received, EX, when you are a little more tactful when you disagree. That's not economics theory, of course, but rather simple courtesy.

EX-GMU-Student May 31, 2009 at 10:23 pm

Doug, you are correct. Thanks for pointing that out.

EX-GMU-Student May 31, 2009 at 10:25 pm

Correction: John Dewey, you are correct. Thank you. Doug please disregard my last comment immediately above.

John Dewey May 31, 2009 at 10:43 pm

EX-GMU-Student: "The passage and availablility of the stimulant funds lead to higher stock prices and availabilty of capital. It lead to easier access to money for companies, stablizing unemployment, improved consumer confidence, and higher international demand for American financial assets."

Do you have any evidence to back up all of these claims?

Did the passage of the government stimulus stabilize unemployment after February 17th, as you have just claimed? Here's a few statements from the Bureau of Labor Statistics:

February 6,2009 "Nonfarm payroll employment fell sharply in January (-598,000) and the unemployment rate rose from 7.2 to 7.6 percent"

March 6, 2009 "Nonfarm payroll employment continued to fall sharply in February (-651,000),
and the unemployment rate rose from 7.6 to 8.1 percent"

April 3, 2009 "Nonfarm payroll employment continued to decline sharply in March (-663,000), and the unemployment rate rose from 8.1 to 8.5 percent"

May 08, 2009 "The number of unemployed persons increased by 563,000 to 13.7 million in April, and the unemployment rate rose to 8.9 percent.

These four statements from the four Employment Situation News Releases of 2009 seem very consistent to me. Unemployment has risen steadily both before and after the passage of the "urgent" stimulus bill.

finance articles May 31, 2009 at 10:44 pm

this percentage above 400% in the near future. When a country allows this much debt to accumulate versus its GDP, they have done something seriously wrong. The country’s politicians, business leaders, and citizens have all contributed to this disaster.

I came across this interesting site..check it out http://tiny.cc/6bJ9U Econ & Finance Articles Updated Daily

I came across this interesting site..check it out Econ & Finance Articles Updated Daily

finance articles May 31, 2009 at 10:47 pm

referring to above. Realistically, I know the beast in us will take over and this will end like it did in France in the 1790's. I will, however, not be the one holding the sword.

I came across this interesting site..check it out Econ & Finance Articles Updated Daily

John Dewey May 31, 2009 at 10:56 pm

EX-GMU-Student,

I assume you followed the link provided by Professor Roberts before you responded to his post. As I'm sure you read, the Recovery Accountability and Transparency Board of the U.S. Government stated that:

"One of the main goals of the American Recovery and Reinvestment Act is to provide quick relief to families who are hurting, and to invest in projects that will create jobs immediately. Funds will reach these projects in the coming weeks, and as they do, you will be able to judge whether these resources are being allocated as effectively as possible."

The claim was that funds would reach projects in weeks and jobs would be created immediately.

Professor Roberts correctly pointed out that this didn't happen. Funds did not reach projects in weeks. As the reports from the BLS show, jobs were not created immediately.

LowcountryJoe May 31, 2009 at 11:27 pm

>>But anyways, I never said the stimulus was successful.<<

You never wrote that it was SUCCESSFUL in that you never used that word. You did however speak all glowingly of the positive economic signs that supposedly arrived post stimuloss passage.

>>I think any objective person would have to wait and see what happens in the future before making a judgment.<<

Why wait? Why not just trust the government to do the right things — to centrally plan the economy and steer the economic participants to action/inaction? I'm making a judgment because I care about liberty. I am making a judgment because I have a much deeper belief in laissez faire than I do in the central planners. I making a judgement because, specifically, I side with the objective person and wish to see him or her utilize their inner MaxU/Homoeconomicus.

>>LowCountry wow, you definitely know you economics keywords<<

And I'm throwing some more out there for you. Do you know and are you aware of the key CONCEPTS of those keywords? Did you even graduate before becoming this 'Ex Student'?

EX-GMU-Student May 31, 2009 at 11:51 pm

John, unemployment is a lagging economic indicator. That is because the mechanisms that affect employment are not instantaneous unlike the securities market. It takes sometime for the unemployment data to reflect the changes in the underlying economic conditions. That is the case even if the government is directly creating jobs. I said the employment market has stabilized and that is supported by the numbers you cited, i,e, the rate of new unemplyment claims is decreasing.

As far as the spending goes, the administration can not throw the money out of airplanes. Federal government is a bureaucratic entity where things don't happen very quickly. They said they would get things going in weeks, they never said they would spend the entire package in a few weeks. They have spent $36B so far and that is a good start. I think it is naive to expect more that that.

mcwop June 1, 2009 at 12:10 am

Ex GMU writes:

You are decidedly wrong here. The markets will not wait until the money is spent before they calculate the impact of it.

You are right, and I calculated the impact the second it was announced, and my conclusion is that long term it will be a disaster. Oh, I might add that the administration IS throwing money out of airplanes, and if people don't catch it, then the federal reserve does, and flies it back up to the plane for refueling.

EX-GMU-Student June 1, 2009 at 12:40 am

Lowcountry,

>>You never wrote that it was SUCCESSFUL in that you never used that word. You did however speak all glowingly of the positive economic signs that supposedly arrived post stimuloss passage.<<

But I didn't make the numbers, the signs are there, I just repeated them. The majority of experts are convinced that an economic recovery is likely. There is still a lot of questions on whether we have a short term bounce or a ligit long term recovery. We shall wait and see.

>>I'm making a judgment because I care about liberty. I am making a judgment because I have a much deeper belief in laissez faire than I do in the central planners.<<

BINGO! For you this is about idealogy not about economics. I, on the other hand, am more interested in finding out the truth. Economists who are much smarter than me say that the current economic crisis is much more complex than before and our economic models are not adequate to explain it (the situation is out of the scope of our models, if you know what I mean). I have a real scientific interest to find out if the current action by the administration is working and if so to what extend. Successful or not, this "experiment" will allow us to improve our understanding of the economy and maybe build better models for future.

I respectfully will not response to your comments any further. I have no more interest discussing economics issues with you than I have discussing evolution with a creationist.

K Ackermann June 1, 2009 at 2:12 am

John, unemployment is a lagging economic indicator…

That's an old yarn. The fact is, payroll hours worked is about as leading an indicator as you can get, especially in this consumer economy.

You can watch payroll hours and ports, and pretty much have the lead on activity.

Eric Hammer June 1, 2009 at 8:45 am

I think there is going to be a lot of poor lessons learned from this economic situation. For starters, it seems that in my industry (specialty gasses) that the recession was really overblown. A lot of chip and LCD manufacturers seemed to way over-estimate the downturn and shut down production much more dramatically than they should have in a classic bull-whip effect. Now, some 7-8 months later, they are scrambling to ramp up to full production again after shaking out some lesser compentitors. I suspect people are going to take away not that this was an economic contraction that was perhaps overblown and over reacted to, but rather that X amount of stimulus helped, when really things were not that bad.

Also, our marketing people here have called the bottom of the market pretty much every month of the last 6, estimating that we would be back at full production in another 2 months or so. This leads me to believe that a lot of businesses really don't have a good ability to guess the future in such situations. (Alternately, our demand managers might just not be good at it.) I also note that there have been "economic experts" calling the bottom of the market in pretty much the same pattern, according to the news. That leads me to believe they are not very good at it either, but I suspect that the one or two who have the last correct guess will get a lot of credit for understanding how the market works.

Also EX, what did you mean by "(the situation is out of the scope of our models, if you know what I mean)." Is that some sort of obscure euphamism, or do you really think he doesn't understand what it means to be outside the scope of a model?

LowcountryJoe June 1, 2009 at 9:20 am

>>Economists who are much smarter than me say that the current economic crisis is much more complex than before and our economic models are not adequate to explain it (the situation is out of the scope of our models, if you know what I mean).<<

Yes! So, letting these same economists tinker with the real economy, using real spending, regulation, and monetary polices seems like a swell thing to do since their models are not dialed-in, right? As if your claim the I'm the ideological one [which I unabashedly am, by the way, with no apologies for my pro liberty stance] somehow deflects from your own ideological leanings.

>>I respectfully will not response to your comments any further.<<

Probably a wise decision on your part. Best not attempt to remove all doubt, if you know what I mean.

Thank you for the last word.

Methinks June 1, 2009 at 9:27 am

New information is reflected immediately in the financial market – although saying that pros have "privileged information" implies insider trading by everyone who is not a retail schmoe. This is not the case. The fact is, the SEC has stacked the deck in favour of the pros and against the retail customer. Essentially, the SEC has decided who can execute and when and that means that the government has decided to a large extent who will win and who will lose.

There's some confusion here about the vicious rally and the stimulus packages. The market immediately assessed the stimulus package(s) and priced in EXPECTATIONS. Note that the financial markets' panicked up move did not start with the latest stimulus package. Rather, it began when the uptick rule was promised to be re-instated, the FASB was forced to re-instate mark-to-fantasy for assets, and after a series of announcements that the Fed is bid for EVERYTHING.

The Fed has been manipulating the market for months and the manipulation has been escalating. It's been buying everything from truly sub-prime trash to prime mortgages and every duration debt instrument it can get its hands on – including the 30 year Treasury. There is rampant speculation that the Fed is buying equities as well – directly or indirectly. Likely, indirectly by backstopping Goldman's and JP Morgan's long equity trading losses in the new NYSE SLP program.

Agency trading (retail and institutions trading through their brokers), normally 75% of the market has dropped significantly. Dealer trading (dealers trading for their own account) has picked up and volume in the stock market is very very low and has been throughout the big up move. There is no depth and no breadth to the market. The parabolic move in the last 60 SECONDS on Friday smacks of manipulation or front running the ultrashort ETFs during a period of extremely low volume that non-expiration summer Fridays are usually characterized by.

None of that has anything to do with stimulus. Although, stimulus can certainly distort leading indicators by artificially increasing demand for certain things associated with stimulus spending. I would argue that we are not in unprecedented waters here. There is plenty of empirical evidence on what happens when government runs a command and control economy.

Daniel Kuehn June 1, 2009 at 9:36 am

Oh boo hoo. Proposals needs to be reviewed and approved. They (thankfully) don't just hand out money on the street corner. It takes time and my understanding is the money will be going out soon.

EX-GMU-Student June 1, 2009 at 9:47 am

>>Also EX, what did you mean by "(the situation is out of the scope of our models, if you know what I mean)." Is that some sort of obscure euphamism, or do you really think he doesn't understand what it means to be outside the scope of a model?<<

In that context it was clearly a reference to econometrics implication rather than the general meaning.

John Dewey June 1, 2009 at 10:10 am

EX-GMU-Student,

I can't tell if I'm completely misunderstanding you, or if you are changing your argument as others point out your mistakes.

Professor Roberts provided this link showing that the Obama government claim about the stimulus bill: the federal government would invest the money within weeks to create jobs immediately. Russ then showed that the federal government had spent almost none of the money within weeks – exactly the opposite of what they claimed they would do.

Now, I suspect that you did not follow Professor Roberts' link before impulsively criticizing his post:

"How much money was spent is not important since the market has already taken that money into consideration.
… It is astonishing for an economist teacher to miss the point."

I then pointed out that Professor Roberts criticism of the federal government claim, and his revelation about the results from that claim, were exactly right. Rather than acknowledge that the evidence supported Professor Roberts claim, you then tried to argue someone – me, I suppose – was being naive:

"unemployment is a lagging economic indicator. That is because the mechanisms that affect employment are not instantaneous unlike the securities market.
… Federal government is a bureaucratic entity where things don't happen very quickly. … They have spent $36B so far and that is a good start. I think it is naive to expect more that that."

My beef with you right now is that you crirticized the host here for something he didn't claim at all. In fact, he earlier made exactly the point you now claim to make: that government bureaucracies cannot act quickly, despite their own claims that they will.

As for as who is being naive, IMO "naive" is the label we should apply to anyone who believes that government spending followed by inevitable taxation will help our economy.

John Dewey June 1, 2009 at 10:24 am

Daniel Kuehn: "Proposals needs to be reviewed and approved. They (thankfully) don't just hand out money on the street corner."

That is probably the main difference between you and me, Mr. Kuehn. I firmly believe that millions of individuals should decide how to spend money. You apparently believe central planners should do so.

The federal government could have "stimulated" the economy by a large and immediate reduction in business and personal income tax rates. That's not exactly "handing out money on the street corner". But it would have put more money into the hands of the citizenry much faster than the Obama/Democratic "urgent" stimulus plan. And the end result would have been a much more productive economy.

Central planning – centralized control of the means of production – just doesn't work. Closet socialists can claim that they are not really socialists – but only if they create a new definition for the word.

John Dewey June 1, 2009 at 10:25 am

EX-GMU-Student: "They said they would get things going in weeks, they never said they would spend the entire package in a few weeks. They have spent $36B so far and that is a good start."

The government could have "spent" the entire stimulus within weeks – but only if the Obama administration was willing to let U.S. citizens decide what to spend the money on. Personal tax rebates could have flooded the economy with dollars. Of course, there is little political power in tax rebates. Corporations do not shower Democratic coffers with donations in order to gain access to personal tax rebates.
Obama is a socialist. Perhaps not because he believes the ideology, but rather because socialism is the route to political power.

Methinks June 1, 2009 at 12:03 pm

excellent point, Mr. Dewey.

But then it wouldn't have been possible for government to shovel money into failed institutions and provide a persistent bid in the open market to inflate assets. In the face of this activity, I don't think a tax cut would be possible.

K Ackermann June 2, 2009 at 5:00 am

For starters, it seems that in my industry (specialty gasses) that the recession was really overblown.

Eric, it sounds like you are saying your industry really didn't see a downturn in business during the recession.

The recession itself was/is a severe recession, and its effects will be felt for quite a bit longer in the broader economy.

PeterVV June 2, 2009 at 6:27 pm

I think we all might all be missing the point a bit. The post is about the speed of stimulus spending AND about the scale. It's small. Roberts points us to a significant dichotomy $35 billion(stimulus so far) to $14 trillion(US GDP: 13.84 Trillion). It's a drop in the bucket!

Further, regardless of whether it is/was/will work, it's a side show to bigger forces in the economy both private AND public. Next to the Fed's open market operations for 2009 (up around 200 billion for 2009 alone http://www.newyorkfed.org/markets/pomo/display/index.cfm?showmore=1&opertype=orig) this is all rather irrelevant.

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