Economists Credit Stimulus For Getting Economy Back On Track

We were told it would be a big boondoggle, that it wouldn’t work, that it would only increase our debt.

And yet the following from the Wall Street Journal tells a decidedly different story…

The U.S. economy is beginning to show signs of improvement, with many economists asserting the worst is past and data pointing to stronger-than-expected growth. On Tuesday, data showed manufacturing grew in August for the first time in more than a year. “There’s a method to the madness. We’re getting out of this,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight.

Much of the stimulus spending is just beginning to trickle through the economy, with spending expected to peak sometime later this year or in early 2010. The government has funneled about $60 billion of the $288 billion in promised tax cuts to U.S. households, while about $84 billion of the $499 billion in spending has been paid. About $200 billion has been promised to certain projects, such as infrastructure and energy projects.

Economists say the money out the door — combined with the expectation of additional funds flowing soon — is fueling growth above where it would have been without any government action.

True, this money won’t last forever, but everybody knows it won’t and so the market will adjust accordingly.

And let’s clear up one thing right now…the idea that doing nothing would have been better than freeing up stimulus dollars. Again, the WSJ…

Many forecasters say stimulus spending is adding two to three percentage points to economic growth in the second and third quarters, when measured at an annual rate. The impact in the second quarter, calculated by analyzing how the extra funds flowing into the economy boost consumption, investment and spending, helped slow the rate of decline and will lay the groundwork for positive growth in the third quarter — something that seemed almost implausible just a few months ago. Some economists say the 1% contraction in the second quarter would have been far worse, possibly as much as 3.2%, if not for the stimulus.

For the third quarter, economists at Goldman Sachs & Co. predict the U.S. economy will grow by 3.3%. “Without that extra stimulus, we would be somewhere around zero,” said Jan Hatzius, chief U.S. economist for Goldman.

So had we done nothing, and I’m including the bank rescue in this, I don’t really think there’s any doubt that credit would have completely frozen up, we would have seen massive layoffs and we would have been in a world of hurt. But, as is the case in these once-in-a-lifetime situations, government can intervene, shore up the system and provide some relief…and then go away.

Take the TARP for example…a large number of the banks have repaid their share PLUS interest, which means we’re on track to actually realize some profits from the deal. Some are even suggesting that our bailout of Freddie and Fannie could turn out to be a worthwhile investment.

Here’s the question: If the economy continues to rebound, unemployment drops and we actually end up making money on the TARP program…will Libertarian and Republican economists admit that sometimes the government can play a positive role in times of dire economic stress?

Here’s another question: Will liberal economists concede that we didn’t need double the money or nationalize the banks?

(Cartoon: Division of Labour)