Stimulus 101--A Bridge Over Troubled Waters | Invest & Innovate | Steve Levy | Palo Alto Online |

Local Blogs

Invest & Innovate

By Steve Levy

E-mail Steve Levy

About this blog: I grew up in Los Angeles and moved to the area in 1963 when I started graduate school at Stanford. Nancy and I were married in 1977 and we lived for nearly 30 years in the Duveneck school area. Our children went to Paly. We moved ...  (More)

View all posts from Steve Levy

Stimulus 101--A Bridge Over Troubled Waters

Uploaded: Jan 31, 2010
This is the first of a series of blogs about the economy, stimulus efforts and the role and challenges of government anti-recession efforts.

Sometimes our economy hits a downturn. There is not enough spending to keep everyone employed. Production drops and unemployment rises as workers are laid off. Recessions can start as a result of an energy price shock as in 1974 or policies by the Federal Reserve Bank to raise interest rates to fight inflation as in the early 1980s or from a sharp slowdown in investment spending as in 2001 after the bust and the Y2K buildup..

The current recession started with a downturn in housing and quickly spread to the financial sector as lenders held loans that were facing default. The resulting financial market paralysis, stock market and housing price declines left consumers with high debt and losses on their homes and retirement portfolios. Consumer spending fell on top of the sharp drop in construction and the recession accelerated. Most businesses faced a loss of customers and had no reason to expand production or hiring. In fact businesses responded to the decline in sales with layoffs as they had fewer customers to serve.

It is the federal government's role to lead the fight to end recessions and help the economy grow. This is written in law, has been a widely accepted role for government and has been broadly supported in all previous recessions.

Federal policy has lots of tools to fight recessions. These tools fall into two broad categories—1) incentives for consumers and businesses to spend more and 2) direct additions to spending by governments. Another way to categorize anti-recession policies is that some are monetary policies dealing with interest rates and lending and some are fiscal policies dealing with tax rates and government spending.

The two most widely used policies historically have been interest rate cuts, tax cuts and increases in safety net spending, for example, for extended unemployment insurance benefits and food stamps... In this recession these policies have been used but in addition Americans are experiencing and now debating several other policy approaches that have been adopted.

In the current recession the Federal Reserve Bank has reduced short-term interest rates, the traditional policy, but in addition has extended large credit guarantees and become a major lender for housing. The most hotly discussed policy, though not the largest, was the TARP program to provide funding to banks, car companies and AIG in order to prevent further financial system collapse. Congress has approved two small general tax cuts in 2008 and 2009), the traditional policy, but, in addition, adopted specific tax cuts targeted at home and car purchases.

Congress boosted direct spending for extension of safety net programs such as unemployment insurance and food stamps, the traditional policy, as part of the $787 stimulus program adopted in February 2009. But in addition, the stimulus plan included support for state and local governments to minimize layoffs and service cuts and investments in construction projects and the beginning of long-term investments in energy, education and health care.

Although the $787 billion plan is called the "stimulus" plan, in fact all of these efforts are part of federal government policies to stimulate spending and economic growth.

Stimulus efforts are "a bridge over troubled waters" designed to support spending in the economy until private investors and consumers regain confidence and resources to increase spending that results in workers being hired and unemployment being reduced.

Good stimulus efforts, i.e. the sturdiest bridges over troubled waters meet three criteria. They are temporary, timely and targeted.

Stimulus programs should be temporary because they all contain long-term problems if they go too long. Too much monetary policy ease can lead to high inflation down the road. And too much deficit spending can create a high debt burden for future generations and damage America's credit rating.

The temporary tax cut and spending increases in the current stimulus efforts will increase the short-term federal deficit. That is actually the point—to borrow from the future to put extra money into the economy now while the private sector regains confidence. Stimulus efforts are designed to temporarily make up for the shortfall in spending that is leaving workers unemployed.

The problem is not the temporary deficit to jump start the economy but whether we have the will to reduce the deficit in the future when the recession is over.

The test for when to end stimulus efforts is when you think the private sector is strong enough to support sustained job growth, i.e., when we no longer need a bridge over troubled waters. I will write about this in the next blog. But there is a conflict—stopping too soon leaves the economy subject to high unemployment; stopping too late risks inflation and high debt levels.

The current stimulus efforts can be criticized for not being sufficiently timely or targeted. Both parties fudged the criteria in the current stimulus plan by including funding to eliminate the alternative minimum tax for 2009 and including funding for what are really long-term investment projects. As a result the infrastructure monies have taken very long to get into the economy in some cases.

CNN is running a series on uses of the $787 billion stimulus package. Some uses seem silly to viewers and raise legitimate questions. It is good to remember that local projects are chosen locally and submitted for funding. Doing better would involve more, not less, federal control.

While there is partisan debate about the stimulus (is there anything now that does not spark hot and partisan debate?), the evidence as to where we get the biggest bang for the buck is quite consistent whether you listen to the economist who advised John McCain or to the administration's economists.

The biggest bang for the buck comes from unemployment insurance and food stamps, followed by funding for infrastructure investment and state and local government followed by temporary payroll tax cuts.

We are still treading troubled economic waters. The calls for tough long-term budget discipline make sense. But the dangers of high unemployment remain serious. The next blogs will discuss whether the stimulus plans have worked, whether we need more stimulus and where this all fits into the debate we are having about the size and role of government.
What is it worth to you?


Posted by Paul Losch, a resident of ,
on Feb 1, 2010 at 10:46 am

Paul Losch is a registered user.


Thanks for the article. There are two areas that I suggest you address in future commentary.

The first is permanent structural changes in the US economy, and the impact it has on jobs and a multitude of other aspects of how things will work going forward. Fiscal and monetary policy have their impacts, but if we are not investing in the right business and employment models, we are swimming against the tides of China, India, inter alia.

The second is the dilemma faced at the state and local government level. Even if the federal government is acting appropriately and responsibly going forward (which itself can be a subject of debate), there is, in my opinion, a national, highly distributed, financial crisis amongst city, county and state governments. This crisis is very intractable, and has impact on fundamentals such as roads, schools, and other key "infrastructure" components that are critical to enabling a healthy economy.

Posted by Kerry, a resident of ,
on Feb 1, 2010 at 7:27 pm

What percentage of the federal budget is interest on the debt? Is is growing or shrinking? What effect will this have on the future well being of this country?

Most of these issues get resolved through inflation, because the politics does not suffer through program cuts. Is this a good time to buy real estate, and other hard assets, as an inflation hedge?

Posted by stephen levy, a resident of ,
on Feb 2, 2010 at 6:04 am

stephen levy is a registered user.

Thanks Paul and Kerry. I will have time to respond in a day or two.

Posted by history, a resident of ,
on Feb 2, 2010 at 6:04 am

Bottom line: Look at history and what has worked and what has failed in the past.

Start with FDRs admin and what he learned to do by his second term.

Move forward to JFK and what he did to get us going.

Move forward to Reagan and what he did...and keep moving forward..when does our economy improve and how did it?

Ethereal discussions mean nothing without supportive, historical, real-life, human grounded data.

Posted by History, a resident of ,
on Feb 2, 2010 at 6:30 am

For example...want to stim an economy? Stop punishing those who produce. Historically..every time taxes rise, the economy sinks more, the tax revenue shrinks.

Remember the promise "tax breaks for 95% of the people" Well...only 56% of us pay any taxes anyway, and it looks like most of us who actually pay any taxes at all are going to start paying MORE taxes now...with Obama's plan to sunset a lot of the tax cuts he/Dems liked to state were "for the rich"..( now defined as Middle Class)

See below

Web Link

Posted by History, a resident of ,
on Feb 3, 2010 at 6:01 am

Largest Fed Payroll..ever

Web Link

Who, exactly, is going to pay for all these non-producing govt jobs, the largest increase in govt jobs since Carter, and the largest number ever..?

It is as if there is a systemic belief that we can grow the money on trees. I guess we are, since we are printing on paper non-stop, such that we have doubled the money supply in just 18 months..( How does inflation, massive, start??)

It would be interesting to add together ALL govt employees, city, state AND fed, and see what percent of our workforce is now tax paid by producers. Obviously, some "non-GDP producers" are necessary to a functioning society, those in service to our health and teachers, for example, road builders etc. But...

Carry it to its logical conclusion..if EVERYONE is a "govt employee", who is left to produce enough to pay them?

Answer: Nobody. It is all borrowed from others or future generations by then.

Posted by SCARY REUTERS Story, a resident of ,
on Feb 3, 2010 at 6:44 am

Very scary, I just tried to re-access the story about Back Door tax increases on the middle class, and noticed that Reuters "pulled" the story about backdoor tax increases on the middle class due to "error in facts"..

Very, very scary....who pulled it and why, given that there wasn't one single error in that story?

The only reason they pulled it is here...

Web Link

It is entirely based on the Obama Admin's "word" that, no..they won't sunset the tax cuts for under $250,000/year... this is ridiculous. A bunch of tax cuts are scheduled to sunset this year, and Reuters can't allow a report on the upcoming sunsets? We have to just believe the Dear Leader that "he" won't let this happen?

Don't trust Reuters. If ever you needed proof of propoganda machine, this is it. Imagine if this were the story under Bush, and Reuters just "believed" that Bush wasn't going to raise taxes on everyone after all, cuz he said so.

Posted by Kerry, a resident of ,
on Feb 3, 2010 at 10:24 pm

"Crucially, projections of the overall debt-to-GDP ratio for the US are seen rising from 53 per cent in 2009 to 73 per cent in 2015 and 77 per cent by 2020.

Moody?s, however, says this understates the overall US debt level.

?Using the general government measure, including state and local governments as well as the federal government, which is used internationally, this ratio would be well over 100 per cent in 2020.?"

Web Link

I find this to be remarkable. Am I just lacking in sophisticated economic thinking? Moody's seems to think it is important, becasue it is signaling that it will downgrade U.S. soverign credit rating. This sounds, to me, like hyperinflation is around the corner along with depressed economic growth, aka stagflation. We had this in the late 70's.

Posted by 6 million lost jobs in 2009, a resident of ,
on Feb 5, 2010 at 6:12 am

Web Link

Above is total job loss by CNN money in 2008

This is total job loss..period..since beginning of 2008. Made a big deal about "worst job loss since WW2". Who was in office?

Web Link

Above is total job losses since same period, for a total of 8.4 million job losses.

Ok..let's do the math.

2.6 million in 2008...8.4 million in 2009...8.4-2.6 is..about 6 million lost jobs in 2009.


Where is the critical journalism? Where is the thinking reporter who mentions that this number would be even higher in 2009 by hundreds of thousands of jobs had it not been for the massive increase in FEDERAL govt employees ( on our children's tax dollars, borrowed from other countries).

Normally this unemployment number should refer to lost PRIVATE SECTOR jobs in real economics. Otherwise one could say that everyone is employed in..say..Cuba..where all are on "govt" jobs.

Put that information into your cooker and let it steam a while. Add in all the state, county and govt workers ( anyone have the total number of State, County and City govt employees in our nation?).

So, why does CNN money make a HUGE deal out of 2.6 million jobs lost in 2008, but nowhere..and I mean nowhere..can I find anything about total private sector jobs lost ( almost 6 million) in 2009?

Do not trust the media. Think for yourself. Do your own math.

Posted by 6 million lost jobs in 2009, a resident of ,
on Feb 5, 2010 at 6:28 am

Web Link

Out of curiosity, I looked up total CA State Employees ( which actually isn't a "total" as the rest of us would think of it, but is their definition of "total". This doesn't include CHP nor National Guard.

And the number was 237,000 employees. Does anyone have the time to add up all the Country employees? ( On the same link).

Local city govts would be interesting also, but who has time for that?

Bottom the time we are done, what are we betting in total number of tax paid employees in California alone? .5 million?

Multiplied by how much across all the states? Do you suppose we have perhaps another 5 million in State tax-paid employees?

Let's see a comparable sized in population State,when any of us have time..

Posted by 6 million lost jobs in 2009, a resident of ,
on Feb 6, 2010 at 5:32 am

What's up Palo Alto? You have no reaction to having 6 million lost jobs in 2009? 2.6 in 2008? Biggest growth in 2009 in Fed Govt spending ever? Biggest growth in Fed Govt employees in 2009 ever?

No interest in examining WHY and how to turn the tide back to prosperity?

Do you agree with Mr. Levy's posit..more "stimulus funding" with our children's taxes to pay back the borrowed money we are printing at 42cents/dollar borrowed rate is a good idea?

Or do you think there is a better way? Do you agree that this was a "bridge over troubled waters" idea, with the first Stimulus in Spring of 2008, and then again the second in Feb of 2009?

ONE TRILLION dollars borrowed so far from our kids and massive takeovers and threats to take over private you think it hurt or helped, as we continue to lose jobs monthly?

Should we borrow more, from our grandkids now? And give more private sector power to our tax paid employees? Or should we change course?

How many more jobs lost before we wake up?

Posted by GHU, a resident of ,
on Feb 6, 2010 at 12:38 pm

6 million,

History shows that the only way to get the economy moving when demand dries up is through stimulus spending. It is unfortunate that we have to go into debt to save the economy, but we have republican deregulation going back to reagan to thank for this. Of course, it makes matters worse that Bush ran up the deficit while the economy was still growing.

Sadly, we do need more stimulus.

No one is happy about the number of jobs lost. What is your point? It is, unfortunately, time to pay the deregulation piper.

Posted by History, a resident of ,
on Feb 6, 2010 at 3:06 pm are being sarcastic, right? When you say that borrowing money for welfare work gets the economy moving as shown through history..right?

If you are, it is going to go over the heads of a lot of folks.

If you aren't, then please cite a country or State in the last 100 years which has come out of a recession or depression by taking from its people born and unborn. I would love to have some hope that everyone since Keynes was disproved are actually the wrong ones, and that Keynes is being vindicated.

Keynes being the father of "Keynsian Economics" which you are talking about..and whose "multiplier factor" , though well meant, was disproven in the first time it was tried in the USA in the early 30s..and the second time in the 70s...and again in the early 90s...and now.

Work Projects, like the gorgeous little "Folly" at the Reservoir up by 280/92 are pretty, and better than people sitting at home listening to the radio, so that they are at least salvaging some pride by doing work for their welfare check ( the current equivalent of the "stimulus spending" programs. But they drain money from the producers of goods and services that others want to actually buy and trade for...thus drain the economy, not stimulate it.

When private individuals band together for a huge profit motive, and build a car, for example, that everyone wants to buy, it is called "producing". When some bureacrat takes money from your pocket to build a car that few can buy, or a road that few will use, let alone want, it is called "stimulus spending", and adds nothing to the economy. It is just called "distributing the wealth" and has led to economic failure every time it has been tried so far.

I hope this time we are doing it "right" so it doesn't fail...but thus far I can only see that it would have been better to not scare the *&^% out of monied people through takeovers of businesses, govt back up of contract-dissolutions, and constant denigration of anyone who works hard, bets their lives on a business, and then wins big... so that they dried up their businesses and investments and are riding this political tide out.

Posted by History, a resident of ,
on Feb 7, 2010 at 6:41 am

Wait a sec....I just learned we lost 20,000 jobs in January.I thought our unemployment number "dropped" a whole .3% from 10% to 9.7%

Somebody explain this snow job math to me can we lose jobs but gain employment?

Something is really, really wrong here, even beyond my initial post.

This whole journalism snow job stuff is getting beyond scary.

Posted by GHU, a resident of ,
on Feb 7, 2010 at 7:22 am


Do you read economics? Look back to the 30s etc. and read up a little. Almost all economists now agree that Keynes has been vindicated.

The problem with your theory is that the the "producers of goods and services that others want to actually buy" cannot sell their services because people aren't buying. Either they've lost their jobs or are afraid they will. Haven't you been reading the news?

The major problem with the stimulus so far is that it was too small.

From your post, it seems that your big beef is giving money/jobs to the "non-producers" and the "non-monied people"--by which I take you to mean people who have lost a job or are poor, rather than with the economics of the stimulus. I suggest you get over it.

Posted by Paul Losch, a resident of ,
on Feb 8, 2010 at 3:44 pm

Paul Losch is a registered user.

I don't want to get into abstract polemics around the economy. I am capable of doing so, but here is the bottom line as I see it as a small business owner:

Tax credits are not what is needed to support small business owners.

President W extolled the virtues of small businesses, and President O is doing the same. All well and good. And BS.

Sales, revenue, more income is what is needed. I don't expect the Federal Government to provide that to my company or other small businesses. That is my job and the people who work for me to do.

But tax credits to hire more people? No. Sales are what a small business bases its hiring decisions, not goofy stuff like this.

Posted by Kerry, a resident of ,
on Feb 8, 2010 at 5:24 pm

I am not a big believer in the theory that we are condemned to repeat history that we ignore. However, there are certain trends in human behavior that seem to be reasonably constant. Self preservation and personal greed come to mind....

I happen to believe that the Great Depression was ended by WWII, not Keynesian economics. Remember the depresion within the Depression in 1938? Remember Morgenthau demanding that too much debt was being incurred? However, there was a hope that created by FDR. The question for me is what would have happened if WWII had not occurred?

Our current situation is not, necessarily, dependent on the model of the 1930s. However, large debt obligations tend be a dicey thing, and they are usually dealt with through economic growth and inflation. If various yield curves go in the wrong direction, we can end up with no economic growth and inflation. This is called stagflation. I am currently worried about stagflation.

Posted by maguro_01, a resident of ,
on Feb 9, 2010 at 5:20 am

"...I hope this time we are doing it "right" so it doesn't fail...but thus far I can only see that it would have been better to not scare the *&^% out of monied people through takeovers of businesses,

What takeovers? GM? Putting money into banks, etc? Most people think that the big banks should have been given an FDIC-style takeover and selloff and it needed to be done first. The too big to fail problem has now been replaced with a too big to rescue problem and big banks are now really speculators backed by the taxpayers. Most people understand that Capitalism has been broken and needs to be reset on its way. I understand that to a Libertarian a bank is a temple. But if one mutates into a hedge fund, what is it then?

AFAIK, when the true-believer Communists took over China in 1949 they didn't fan out to all the businesses and close them. They just went around to the banks and closed them. RIP business. The 2001-2009 administration in Washington in many cases with Democratic votes set the stage for Wall Street to do the inevitable. That, and then recently setting them upright without further intervention was like the turtle giving the scorpion a ride across the river. They turned into hedge funds, not banks and with no supervision banks still don't trust one another enough to do normal banking. RIP business, wasting much of the stimulus which can't be done over again.

" govt back up of contract-dissolutions,"

?? is this people walking away from mortgages or declaring bankruptcy? There was a news story recently about Tishman, a huge company walking away from billions in a mortgage that was underwater. Normal business. "Moral risk" and morality in business conduct are always top-down, not bottom up. Trickle down economics is a failure, but trickle down morality isn't.

"and constant denigration of anyone who works hard, bets their lives on a business, and then wins big..."

This would sound like vanity and rationalization, but instead it probably comes from a Main Street person who mistakenly identifies with corporations that lobby for their environment in Washington. Main Street and Wall Street at this time are separated in concerns and interest more than I can remember at any time. Main Street is Capitalism and markets and where jobs come from. Main Street is not where a manager can bet other people's billions, fail, and walk off with $100 million in severance.

"so that they dried up their businesses and investments and are riding this political tide out."

The Atlas Shrugged scenario? Who cares. Entrepreneurs from around the world are here in California and will cheerfully replace a would be Atlas. One problem we have is that corporations have bought an environment here where they have an effective subsidy to eliminate engineering as a US core competence. In a decade or so science may follow. China's dollar set and peg makes making most things nearly impossible with at least a 10 to 1 cost difference and shut down development in Mexico giving us many new neighbors (we would do the same).

US politicians have a hard time acknowledging that China's economic war has simply beaten them. The last administration used the low prices to lull the voters and the deficit dollars to borrow back invisibly to fund wars, an oddly bloated government, and an economic program of writing checks for the few and turning our country into a Ponzi scheme. The President then must have thought Sun Tzu was a dessert and The Three Kingdoms a Disney theme park.

Posted by Depression of 1920, a resident of ,
on Feb 11, 2010 at 2:49 pm

Interesting thing I JUST learned this morning. 1920 had about a 25% drop in GDP..went to ..umm..I think it was 13% unemployment..home values dropped 50%..

Never heard of it? Me neither. I guess it is because the response was to halve the government spending and cut taxes on all...which brought about the "Roaring 20s" and 1.8% unemployment..yes. that is correct. I wrote 1.8% unemployment..all within a couple years.

Hmm....Why has this massive depression not been ever talked about in our history books?

Answer: Who writes the history books? What are the poitics of most historians/academicians?

Posted by Depression of 1920: Unsung results, a resident of ,
on Feb 13, 2010 at 5:41 am

Here is a link to some data about the 1920 Depression that nobody has heard about...history teaches, start learning.

Posted by Depression of 1920: Unsung results, a resident of ,
on Feb 13, 2010 at 5:49 am

Web Link

Sorry..THIS is the link..forgot to place it.

Posted by History, a resident of ,
on Jul 18, 2010 at 6:31 am

So, how's that bridge holding up? Did it reach the other side yet? Is there ANY good news anywhere to support the bridge?

If tax credits are not good for people and businesses, as posited a few posts up, then shouldn't we just tax everything every one earns above "enough" ( as defined by our POTUS) and distribute it and give it to people who don't earn "enough"? I am sure that everyone will keep working hard to support those who don't.

Somehow that bridge is just not working. I don't think it is because

1) we without PhDs in economics are too stupid to understand "abstract polemics around the economy"

2) we didn't do enough borrowing for more "stimulus" from China for our great-grandkids to pay back

3) didn't disincentive (scare) enough risk-taking hard workers

4) didn't disincentive enough investors

So, now what? Stick with the trickle up poverty model which rewards greedy government and greedy unproducers who want what the producers have earned, , or go back to that trickle down wealth model, which rewards hard work and risk taking...and get bureaucrats in government the heck out of our way, so we can get our economy back?

When we reward hard work and risk taking, we get more of it..which creates jobs. No fancy polemics needed, just good sense. The more we tell millions of hard workers how to spend their money ( regulate their businesses and lives), the more we interfere with the great results from a democracy of the wallet. The more we steal ( tax) from hard workers, the less they work for us to take the next year...simple economics.

At some point we have to stop trying to be "smarter" than our founders. They were brilliant people, setting up, for the first time in history, a government system that has, thus far, lasted longer than any other attempt to do so. Sticking to their philosophical underpinnings, gleaned from their experiences under tyranny and watching France et al struggle with theirs, would be best for us. I don't care how many PhDs/JDs there are in our nation or elsewhere, nobody comes close to topping the incredible beauty of our Declaration of Independence and our Constitution. Let's go back to them. Anything else fails, every time.

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them." - Thomas Jefferson

"A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned - this is the sum of good government."
Thomas Jefferson

Posted by History, a resident of ,
on Jul 20, 2010 at 12:21 pm

Much better said here
Web Link

than what I said above.

Quote from this Spectator opinion piece on the "political ruling class"..this refers to both Repubs AND Dems who ignored the will of the people even 2 years ago when we were screaming out in vast majorities in all polls..DON'T SPEND 700 BILLION on rescuing AIG etc!!
Today, few speak well of the ruling class. Not only has it burgeoned in size and pretense, but it also has undertaken wars it has not won, presided over a declining economy and mushrooming debt, made life more expensive, raised taxes, and talked down to the American people. Americans' conviction that the ruling class is as hostile as it is incompetent has solidified. The polls tell us that only about a fifth of Americans trust the government to do the right thing. The rest expect that it will do more harm than good and are no longer afraid to say so.


Follow this blogger.
Sign up to be notified of new posts by this blogger.



Post a comment

Sorry, but further commenting on this topic has been closed.

Stay informed.

Get the day's top headlines from Palo Alto Online sent to your inbox in the Express newsletter.

Burning just one "old style" light bulb can cost $150 or more per year
By Sherry Listgarten | 12 comments | 2,998 views

Banning the public from PA City Hall
By Diana Diamond | 26 comments | 2,156 views

Pacifica’s first brewery closes its doors
By The Peninsula Foodist | 0 comments | 1,883 views

Premiere! “I Do I Don’t: How to build a better marriage” – Here, a page/weekday
By Chandrama Anderson | 2 comments | 1,424 views

Holiday Fun in San Francisco- Take the Walking Tour for An Evening of Sparkle!
By Laura Stec | 7 comments | 1,415 views


Palo Alto Weekly Holiday Fund

For the last 30 years, the Palo Alto Weekly Holiday Fund has given away almost $10 million to local nonprofits serving children and families. 100% of the funds go directly to local programs. It’s a great way to ensure your charitable donations are working at home.