04/13/2010 05:12 am ET Updated May 25, 2011

Obama's First Year: Stimulating?

In prior posts, I looked at Obama's first year in foreign affairs and domestic issues. This post looks at the stimulus package, clearly the key legislative result from the First Year.

It is really too early to write valedictories for the American Recovery and Reinvestment Act (ARRA). Nonetheless, the administration and most economists call it a success. Republicans call it a failure. The Left calls it too small. Before forming another opinion that will, like the others, be way ahead of real data, let's look a little deeper.

Channeling Julius Caesar, Obama could have said, "All of ARRA consists of three parts:" tax cuts, aid to state and local governments, and investment spending. Like the provinces of ancient Gaul, each has its own landscape.

All tax cuts may be equal in some political circles. In reality, tax cuts are the same in only two ways. First, they increase the deficit dollar-for-dollar, unless offset by spending cuts. Second, the effect is not immediate, but builds over two years as people get their slightly larger paychecks.

Tax cuts are also very different in their ability to stimulate the economy. History shows that lower and middle bracket taxpayers are more likely to spend their income tax cuts than upper brackets, and that capital gains tax cuts result in more investing, but not more spending. The multiplier on capital gains tax cuts is highest, but the delay before the stimulative effect hits the economy is longer than cuts of other types of taxes.

Further confounding the analysis of this cycle, Americans are increasing their savings by paying down debt rather than their spending. In normal times, an increase in saving would shift spending from small purchases to larger ones (cars, houses, and starting or expanding businesses) as banks invest their new deposits in new loans. But with lending, particularly to small businesses, on the rocks, the result of saving rather than spending this tax cut is most likely to dampen and delay the stimulative effect.

The aid to state and local governments produced more immediate results, but more by avoiding spending cuts and layoffs than creating new jobs or programs. From a mathematical viewpoint, reducing a loss is just as good as increasing a profit. But from a psychological viewpoint, it feels totally different. Generals get promoted for winning bloody battles more often than for winning without a fight. So, the part of the stimulus package with the most short term effect got the least attention.

The final part of ARRA was a broad collection of investment spending, from repairs to roads and bridges to accelerated broadband deployment to increases in support for science research. This has been the most visible part of the stimulus bill, and the most hotly debated. It is the only part of the bill which obviously and visibly creates new jobs. It is also the only part that gives individual Congressmen a chance to get in on the political credit for new projects, whether or not they voted for the bill. Hence the irony of legislators, mostly Republican, slamming the bill in Washington while touting the projects at home.

Infrastructure spending arguably has the highest long term multiplier effect, assuming the projects are well chosen and executed without too much waste. That is because they not only create jobs to build and operate the new infrastructure, but the new and/or improved infrastructure makes some part of the economy more efficient and more competitive.

Unfortunately, it takes a long time to benefit the economy. Projects take up to three years to complete, although the benefits flow for decades after. Hoover and FDR both believed in infrastructure spending, but it did not deliver a lot of Depression relief for either of them. On the other hand, we still use the bridges, dams, and post offices built three generations ago.

From the beginning of debate on the stimulus package, the administration was clear that it would take two years for the full benefits to kick in. Since ARRA was enacted, the Republican opposition ignored that point, and Obama and his supporters forgot to reiterate it.

Economically, ARRA is probably about as successful as it could be. While macroeconomic measurement is notoriously imprecise, it is clear that the stimulus bill delivered a lot of economic boost, and will continue to have a strong effect through 2010. The stimulus bill avoided a meltdown in state and local services like schools and law enforcement, just as the TARP avoided a meltdown in the financial system. While the most easily verified accomplishment of ARRA, it is, unfortunately for Obama, the least politically potent.

The stimulus bill gave Obama more political downside than upside, at least so far. The ARRA debate initiated the gridlock politics of Republicans voting "no" on every significant administration proposal - even ones that include Republican concepts like tax cuts, benefit Republican districts, or have support from Republican governors. The rift in Republican ranks was just enough to pass ARRA, but hardened GOP resolve on health care.

The measurable benefits of ARRA have not yielded political benefits for Obama, and the full promise of ARRA is still to be realized. The challenge for Obama in the Second Year is to make lemonade out of these political lemons. Stay tuned for future posts.