Is The Stimulus Really Working?

With the recession apparently over, the White House is eager to credit the American Recovery and Reinvestment Act of 2009 that it pushed through Congress in February with putting the economy on the road to a full turnaround.

But the pros and cons of the massive government spending program are still being sorted out. Here's a brief look at what we know and what we don't about the effects of the stimulus.

How many jobs were created by stimulus spending?

The White House says stimulus programs directly created or "saved" more than 640,000 jobs. But with unemployment at 9.8 percent and expected to go higher, critics take issue with those numbers.

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"I honestly think it's impossible to differentiate jobs created from jobs saved," says Steven Ricchiuto, an economist with Mizuho Securities USA. "That's just impossible to know. It's politics at its worst for the administration to suggest otherwise."

The economy grew at a 3.5 percent pace in the third quarter after shrinking for four quarters in a row. How much of that growth is stimulus-related?

Council of Economic Advisers Chairman Christina Romer says 3 to 4 percentage points of GDP can be attributed to stimulus spending and incentives. "This suggests that in the absence of the Recovery Act, real GDP would have risen little, if at all, this past quarter."

Most economists wouldn't go that far, but they don't discount the effect of the stimulus.

"I think with the combination of the Cash for Clunkers and tax credits for first-time homebuyers, you're looking at easily 2 percent of the 3.5 percent growth rate for the quarter," Ricchiuto says.

David Wyss, chief economist at Standard & Poor's, says the stimulus represents about half of the GDP growth for the third quarter. "Cash for Clunkers could have added a full percentage point all on its own," he says.

How much of the stimulus money has already been spent?

The Recovery Act is a two-year program, and most of the spending has yet to be rolled out. So far, about $339 billion, or 43 percent of the $787 billion in stimulus funds, has been paid out, according to Recovery.gov, the government Web site that tracks the stimulus initiative.

Is there need for another round of stimulus?

If much of the recent growth in the economy can be traced back to government spending, then calls for more spending are likely. But "we should at least give the current stimulus a chance to work," Wyss says.

"With the budget deficit being so large, they shouldn't try to do anything else," says Ricchiuto. "You can put a Band-Aid on a cut but in the end; it just needs to heal on its own."

What could happen if the stimulus is wound down too quickly?

The White House and some independent economists have warned that pulling back on stimulus spending too early could kick the legs out from under the recovery and trigger a "double dip" recession.

That concern is reinforced by reports that consumer spending continues to fall (the Commerce Department reports a 0.5 percent plunge in September, the biggest drop in nine months) and the expectation that unemployment will keep rising, staying above 10 percent through next year. That, along with tight consumer credit, will put a lid on consumer spending, which accounts for a whopping 70 percent of GDP.

Ricchiuto says he's "solidly in the double-dip camp."

"I think consumers are going to increase their savings rate even more and that is going to have negative short-term consequences for the economy," he says. "I don't see people looking at the modest gains they've clawed back in their 401(k)s and saying 'Gee, I ought to go out and spend.' "

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