SALON

Friday, Jul 31, 2009 4:59 PM UTC

The stimulus is working

Shocker: Fiscal juicing stops economic free fall. Plus: Why more tax cuts would be the wrong medicine

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Topics: How the World Works, Great Recession, Federal Deficit, Inflation,

The Economic Policy Institute’s (EPI) Josh Bivens declares that the stimulus plan is largely responsible for the significant slowdown in economic contraction measured in the second-quarter GDP numbers released today. (Found via Brad DeLong.) According to Bivens a “consensus” of macroeconomic forecasters gives the American Recovery and Reinvestment Act credit for 3 percentage points of annualized GDP growth in the second quarter, turning the economy’s “performance from disastrous to merely bad.”

Despite the overall contraction, the fingerprints of the American Recovery and Reinvestment Act could be seen in some aspect of today’s report. Federal government spending grew at an 11 percent rate in the quarter, adding roughly 0.8 percent to overall GDP. State and local government spending grew at a 2.4 percent annual rate, the fastest growth since the middle of 2007. It is clear that the large amount of state aid contained in the ARRA made this growth possible.

Furthermore, real (inflation-adjusted) disposable personal income rose by 3.2 percent in the quarter, after rising by only 1 percent in the previous quarter. A large contribution to this increase was made by the Making Work Pay tax credit passed in conjunction with the ARRA, as this was the first full quarter that the credit was in effect. Inflation-adjusted transfer payments (including a one-time payment to Social Security recipients) rose at an annual rate of over 6 percent in the quarter as well.

The most disconcerting news in the new GDP report is that consumer spending declined more than expected in the second quarter, prompting Bloomberg News to declare in a headline that the GDP report indicated that the economy was “faltering” — exactly the opposite take almost everyone else took from the numbers. But Bivens argues that the reason for the decline in consumer spending can be traced to the continued rise in the personal savings rate — from 4 percent in the first quarter to 5.2 percent in the second quarter. And that explains why the Republican prescription for economic hard times — more tax cuts — is the wrong medicine. Cautious Americans would just continue to save the windfall.

This slippage between personal incomes and consumption spending caused by a rising savings rate makes plain that, instead of focusing on even more tax cuts, it was wise to make sure that much of the ARRA was devoted to direct public investment spending. The public investment spending in the ARRA, while not having a significant impact in the second quarter, will provide an even stronger boost to the economy in quarters to come.

The EPI is usually described as a left-wing, labor-oriented think tank, so it’s not a huge surprise to see Bivens crediting Keynesian fiscal spending for boosting the economy, while downplaying the utility of tax cuts.  But if Bivens’ overall analysis is correct, it suggests the  third quarter could be a bit more sunny than most economists have been anticipating.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21. More Andrew Leonard.

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Gripping photos: The people of the Turkey protests (slideshow)

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  • The protests take on a festive element as police forces move out of the park and square. Wearing a gas mask, this young man dances to traditional Turkish music in front of Taksim Square’s Ataturk Monument.

  • In Gezi Park since March 31st, this protester, originally caught off-guard by the Government’s teargas and water cannons, went out and bought a Russian army mask from WWII, preparing for what was to come.

  • This rambunctious boy seems to be enjoying the chaos. After taking this picture he threw a stone at the already destroyed building in the background.

  • Forming a line, the police face off directly with protesters in Taksim Square. After a while, they retreated and there was a general cheer – a back-and-forth dance that has been common since the beginning of this protest.

  • An elderly woman in Gezi Park reads the news. The tent community occupying the park was violently destroyed on June 16th.

  • Many different groups had set up booths to promote their cause in Taksim Square and Gezi Park. Standing in front of one, this man waves his flag while posing with conviction.

  • Many home-remedies are used to minimize the effects of tear gas. This woman has put a milky solution on her face, removing her mask after the tear gas dissipated. Before sunrise, the police came again for another round of teargasing.

  • People capitalize on the uprising -- selling flags, beer, gas masks, sky lanterns and spray paint to name just a few of the popular items.

  • On Monday morning, June 11, the police execute a strong offensive. Many plain-clothed police officers, like the ones seen here, clash with protesters in the side streets away from the main stand-off in Taksim.

  • The authorities seem to be most aggressive in the night, pushing protesters away from the square and park. After being teargassed this young woman catches her breath with other protesters on Siraselviler Street.

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