Why the Stimulus Is Helping the Economy but Not Obama

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Mandel Ngan / AFP / Getty

President Barack Obama, center, Treasury Secretary Timothy F. Geithner, left, and Federal Reserve Chairman Ben Bernanke meet with regulators June 17, 2009, in the Roosevelt Room of the White House

Proving a negative is always a challenge, but there's mounting evidence that the controversial $787 billion stimulus bill is achieving one of its major goals: shortening the recession. Economists at Goldman Sachs say the bill, officially called the American Recovery and Reconstruction Act, has resulted in a 2% to 3% boost to annual GDP in the second and third quarters of this year, turning what could have been a worsening recession into potential growth. For President Barack Obama, whose poll numbers have dropped precipitously from around 65% to around 50% as Americans have become worried about government spending and health-care reform, that should be good news: he fought hard against Republican opposition to push the bill through Congress as one of his first legislative acts, and the fact that it's working should be a vindication.

But it's not that easy. Recent polls show widespread disapproval of the stimulus bill: 51% of Americans polled in August 2009 by USA Today and Gallup said they thought the government should be spending less under the plan, while 44% said they thought the government was spending the right amount or should be spending more. If anything, it seems the stimulus plan is hurting the President even as it helps the country.

The most obvious reason for that disconnect is jobs: despite the signs of a turnaround, unemployment remains stubbornly high at 9.7%, with employers cutting 216,000 jobs in August. While jobs always trail economic rebounds, the unemployment number is higher than economists thought it would be, even in the worst-case scenario forecast by the Treasury Department's stress tests last spring. The point is not lost on Republicans, some of whom have argued lately that no more of the stimulus money should even be spent. "The metric of this bill was job creation," says Don Stewart, spokesman for the Senate's top Republican, Mitch McConnell, "and it hasn't done that."

Still, one would think that the mere infusion of $88 billion into the economy in six months — that's how much the government has spent so far — would buy Obama some goodwill; certainly many local and state politicians, including some who originally opposed the stimulus, have been quick to claim credit for stabilizing their economies with the federal largesse. Except, as it turns out, the very thing that makes the stimulus help the economy in the short term is a political loser: the program is giving most of its money to the poor. Of that $88 billion, the majority has gone to low-income recipients. Nearly $28 billion has flowed to Medicaid; $19 billion to unemployment payments; $10 billion to states to bolster educational programs that primarily target the poor; $4 billion to student financial assistance; and $1 billion to rental assistance, among the biggest-ticket items alone. And that doesn't even include the share of the $62.5 billion in tax breaks available to the poor through the cut in withholding taxes; the Making Work Pay program, which gives tax breaks to wage earners; and the extension of COBRA health-insurance benefits.

All that money works well to stimulate the economy because the poor don't save — they spend, and fast. "Recovery money aimed at low- and moderate-income households has a dual benefit," says Chad Stone, chief economist at the left-leaning Center on Budget and Policy Priorities. "Besides relieving hardship, it gets spent quickly, stimulating economic activity that would not otherwise take place."

But giving money to the poor never won anyone many crucial swing votes. The poor are already disproportionately likely to vote for the Democrats and Obama, if they vote at all. And at a time when the President is under attack from the right wing for being a free-spending leftist, shoveling tens of billions of dollars into redistributive programs doesn't help his image with wavering independents who are nervous about the growth of government deficits.

The Administration is doing its best to push back. Joe Biden, Obama's point person on the stimulus bill, delivered a lengthy defense of it Thursday, Sept. 3, at the Brookings Institution. Thanks to the recovery act, he said, "Instead of talking about the beginning of a depression, we're talking about the end of a recession, eight months after taking office." Unfortunately for him and Obama, the money that is boosting the economy isn't boosting their poll numbers.