Is the US stimulus package working?

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European Union governments and the International Monetary agreed on a 75bn euro rescue package to prevent a debt crisis from spreading across Europe.

But is it sensible for governments to intervene in the market place?

Fifteen months after an economic stimulus package was put in place in the US there is much disagreement about whether it has achieved its aim.

In February 2009, Congress in Washington approved tax cuts and spending of $787bn (£533bn) to prop up the US economy because companies and people had stopped spending money themselves.

Image caption,
Money has been used in San Fransico to build a fourth tunnel through the hills

Professor Laura Tyson of Berkeley, who chaired [former] President Bill Clinton's Council of Economic Advisors and now advises President Barack Obama, says the stimulus and the support for housing "took a catastrophic situation and made it much less bad".

"When private sector demand is collapsing, investors are not investing and consumers have lost their jobs and the value of their house so they are not consuming", she says.

"So basically the government comes in and puts some demand into the system - that is what stimulus is - that is the logic."

Failed strategy

Professor John Taylor of Stanford University says the stimulus package has not made much difference.

"Looking at the specifics we can't find much evidence that it has worked at all," he says. "What has happened would have happened anyway."

He maintains that there has been a good turn-around of growth.

"It was minus 6% and now it is plus 6% - but almost all that is due to changes in investment, changes in inventory behaviour, and little to do with government purchases."

That does not necessarily mean that the money has been wasted.

"Stanford University got some money to help research - but that is not the kind of thing that creates jobs or gets the economy moving again," he asserts.

"The stimulus package in the US had very little road building - it was more the transfer payments to individuals, so the reality is [that] of the $787bn, only about $21bn was for infrastructure building in the first year," he says.

Jobs created

California received $50bn. Some $197m of that was to build a fourth road tunnel through the hills above Berkeley.

The condition was that projects had to be ready to go - shovel ready, in common parlance, and the project has been a relief for workers.

"Before the crash we had to go looking for workers - now men turn up every day looking for work," says Jeff Weiss, one of the managers on the tunnel scheme.

"We are grateful for the money because it looked like the project was going to be delayed," he says.

The tunnel will create about 4,500 jobs both directly with people working on the project itself and indirectly, such as the suppliers of steel and concrete, or the motels who put up the workers.

Critics of the stimulus package say it provides too few jobs for too much money.

But the calculation is complicated because it is not just about jobs.

Local people also got a new tunnel and an easier commute.

Fighting fraud

California has been allocated $50bn and the Republican governor, Arnold Schwazzenegger, appointed the Democrat Laura Chick as Inspector General, Federal American Recovery Act Funds, to keep track of the stimulus money.

The governor said he did not want a single dollar wasted or sent back to Washington,

"We do not do audits because they would take too long, but I have two strike forces and these teams are following the money literally on the street," says Laura Chick.

"We have put the fear of God in any fraudster types who were sitting there rubbing their hands saying 'wow here comes all that government money and I'm going to take advantage of it'," she says.

The FBI told her she could expect between 7-10% fraud and that after Hurricane Katrina in New Orleans there was 17% fraud.

"What we have found is predominantly book-keeping and accounting issues," she says.

"Something called the Work Investment Board got millions of dollars to give work experience and employment opportunities to at-risk youth who live in low income neighbourhoods where there is little summer activity," she explains.

"We found that $1m was claimed for rent and overheads whereas the appropriate amount was $60,000.

"They are re-programming the balance back into the summer youth programme," she says.

Future doubts

The hope now is that the private sector is strong enough to provide the missing spending.

"I would say there are two risks to that," maintains Ms Chick.

"There are going to be significant lay offs by the state governments because they don't have the revenues to keep teachers hired, to keep people on environmental protection or railroads for example, so state employees will go down," she believes.

"And the other thing is housing - there is still a lot of uncertainty about whether the erosion in housing values has stopped and whether therefore there is going to be a hiccup in the sales and even in construction industry by the end of the year."

When the stimulus money runs out there may be a need for more.

The snag is, more taxpayer help will be hard to come by politically.

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