$825 Billion US Stimulus May Not Buy Healthy 2009

`With every day that passes, the potential impact on 2009 is diminishing,` said Nigel Gault.

The hole in the U.S. economy is so deep that even $825 billion in extra government spending and tax cuts probably cannot fill it right away.

The best hope for President Barack Obama's stimulus package is that it puts a floor under job losses and sets up a stronger 2010 recovery. It appears to be too late to salvage any semblance of economic growth this year.

"With every day that passes, the potential impact on 2009 is diminishing," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

Global Insight has penciled in a 2.5 percent decline in U.S. gross domestic product for 2009, although without the stimulus, it would have been a full percentage point deeper.

It is a sticky situation for Obama, who had hoped that lawmakers would have a stimulus bill ready for his signature when he took office last week. Instead, it looks like Congress will approve the package only by mid-February.

Even in normal times, it takes months for government spending to spread through the economy. In the midst of a deep recession that has paralyzed consumer and business spending, government checks may wind up sitting in the bank, which means the money does little to stimulate the economy.

Obama has said that 75 percent of the stimulus package will be spent within the first 18 months, although a review by the nonpartisan Congressional Budget Office found that only about 64 percent of the proposed spending and tax cuts would arrive in the first 19 months.

TALL ORDER

Obama has warned that without stimulus, the economy could fall $1 trillion short of its potential. In theory, the government would not have to spend that much to make up the difference because each dollar injected into the economy can generate a bigger return.

The idea is that money spent on building a new bridge not only puts construction workers on the job, but also supports the restaurant where they buy lunch and the stores where they spend their paychecks.

Economists call that the multiplier effect. Calculating the impact, however, is more art than science. With economic uncertainty running high, a bigger portion of that money may be saved rather than spent. See [ID:nN27375590]

Between the housing and stock market slumps, American household wealth has taken the worst beating since the 1930s.

Merrill Lynch economist David Rosenberg thinks losses could approach $20 trillion if his gloomy projections hold true. The shattered nest egg could take $300 billion out of consumer spending each year through 2011, he said.

"The government has to boost its spending by 10 percent for every 1 percent decline in consumer spending just to prevent GDP from contracting," Rosenberg said. That would mean government spending would have to double to offset the drop in consumer spending.

"That's a pretty tall order, even for the most popular president since Franklin Roosevelt," Rosenberg said.

JOB MARKET LOOKS STRONGER

While the final details of the package are still unknown, a version heading for a vote in the House of Representatives on Wednesday includes $358 billion for infrastructure, such as rebuilding roads, and $275 billion in temporary tax cuts.

Tax cuts tend to reach the economy more quickly than infrastructure spending, although even then it probably will not be soon enough to do much for this year.

Most people will receive rebates when they file their 2009 tax returns early next year. Workers could get the money sooner if they choose to reduce the amount of money withheld from their regular paychecks, but that would involve careful calculations and a bit of paperwork.

A key component of Obama's plan is to save or create at least 3 million jobs. Economists are more optimistic on that front, although perhaps not as upbeat as Obama's team.

A paper co-authored by Christina Romer, the head of Obama's Council of Economic Advisers, found that without the fiscal boost, the economy could shed 3 million to 4 million jobs, on top of the 2.6 million lost since December 2007. (http://otrans.3cdn.net/ee40602f9a7d8172b8_ozm6bt5oi.pdf)

Romer and co-author Jared Bernstein, an adviser to Vice President Joe Biden, concluded that a big stimulus package would boost GDP by 3.7 percent and add 3.7 million jobs by the fourth quarter of 2010. Global Insight's Gault said his calculations came up with a 2.5 percent lift to GDP and 2.6 million jobs by the end of next year.

But the Romer-Bernstein paper includes several important caveats that are open to debate.

For example, the analysis assumes households think of the tax cuts as permanent and ramp up their spending accordingly. Some economists worry that will not happen because people are too concerned about rebuilding their savings.

"Barring significant changes in the pending U.S. fiscal stimulus plan, its timing and thrust seem likely to disappoint," Morgan Stanley economist Richard Berner said.