If Americans Don't Want More Stimulus, Will It Work?

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Weak confidence is driving the anemic hiring. Can more government intervention fix the problem?

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The stimulus package proposed by President Obama last night should be considered in light of the two biggest headwinds that the U.S. economy faces: pessimistic consumers and a broken housing market. Yesterday, I explained that the part of the stimulus meant to help slow foreclosures won't work. But what about the other obstacle to recovery -- will another stimulus package boost consumer confidence? Looking at the shifting sentiment towards government, it probably won't.

First, why is confidence so important? It influences spending. If Americans feel good about the economy, then they are more likely to save less money and spend more. That will result in more hiring as firms try to satisfy rising demand for goods and services. So no matter how clever or theoretically effective Obama's proposals are, their success or failure relies on what consumers and businesses actually do with the money the government is injecting into the economy. This means that Americans' growing cynicism towards government could doom a new stimulus package, even if a miracle happens and it manages to pass.

The Psychology of Stimulus

Back in September 2009, opponents of Obama's first stimulus declared that it didn't work. They said that it was, thus far, ineffective and backed up their claims with some data. But I argued that whatever data they might supply can't possibly provide the whole story: we can't fully understand what the world would have looked like without the stimulus package.

In particular, we cannot know for sure how Americans would have felt if the government had merely done nothing. Rewind to early 2009. The economy's sores from the financial crisis were still open and bleeding. Unemployment was rising quickly. Excitement about "hope and change" in Washington had energized the masses. If the government had just shrugged, then consumer confidence would probably have plummeted. At that time government stimulus provided a psychological benefit, which almost certainly had a positive effect on consumer confidence. Even if it didn't boost confidence dramatically at the time, it likely prevented it from falling farther.

Now fast-forward to September 2011: will consumer confidence benefit if another stimulus bill is passed? This question matters a lot, because consumer confidence remains the biggest obstacle to more jobs. Firms are overwhelmingly complaining that a lack of demand is causing their slow hiring. Any other problems they face are secondary. For example, if a firm doesn't foresee consumers wanting more of its products in the near- to medium-term, then a government incentive for hiring will be ignored. 

Americans' Shifting View of Government

If you've been paying attention to politics lately, then you know a huge shift has taken place in Washington to prioritize deficit reduction. This shift was caused, in part, by Americans' understanding that the federal government's finances are on an unsustainable path. Americans viewed the problem as so serious that just 22% wanted Congress to vote in favor of raising the debt ceiling when asked in July, according to a Gallup poll.

Of course, the debt ceiling is a complicated issue, so some polling more specific to how another stimulus might affect sentiment would be helpful here. The best polling I could find on how Americans view the government's efforts to fix the broken economy comes from the Washington Post. Let's start with how people felt about the 2009 stimulus, just as it was passed. Here are the results to a poll that asked," How confident are you that this economic stimulus plan will make the current economic downturn less severe than it would be otherwise?"

wapo stimulus poll 2009 - 2011-09.png

As you can see, a majority -- 58% -- were at least fairly confident that the stimulus would help. We can conclude that the government having passed it should have boosted sentiment.

I haven't found a recent poll that asks Americans how they feel about additional stimulus now. But the Washington Post conducted another poll asking a somewhat related question that can help serve as a proxy. It asked respondents, "In general, when the government in Washington decides to solve economic problems, how much confidence do you have that the problem actually will be solved?" They asked the question in August and last October. Here are the results:

wapo stimulus poll 2010&2011- 2011-09 v2.png

You can see that Americans' belief that the government can help has been steadily weakening. Here's a bar chart that aggregates the three polls (which, admittedly, isn't perfect, because the polls aren't asking precisely the same things -- but it's the best I've got):

wapo stimulus poll bars - 2011-09.png

The shift here is pretty clear. Currently, nearly three-quarters of Americans believe that the government can do little to nothing to solve the nation's economic problems. As a result, it's safe to conclude that the psychological benefit of more stimulus at this time won't be very large: Americans have little faith in the government's ability to help. In fact, a stimulus could hurt confidence if Americans think that the government's efforts will just make matters worse.

But Won't Tax Cuts Increase Spending?

Confidence is an important measure because it help us to understand how spending might rise or fall. But the stimulus could have a more direct effect on spending: it would cut the taxes for both workers and employers. With more money in their pockets, won't they spend it?

Ultimately, the answer to this question goes back to sentiment. If Americans' view of the broader economy remains unchanged, then they will likely keep spending and saving the same proportion of their income that they did before. Additional take-home pay through reduced payroll taxes will boost spending by a bit, possibly by as much as 1%, which is the size of the proposed additional payroll tax cut.

But in a few ways, the stimulus could actually have a negative effect on spending. If cynical Americans worry that the government's intervention will ultimately harm the economy, then sentiment would fall and spending would contract. If Washington hopes to pay for its stimulus by raising taxes in the future or by cutting entitlements like Social Security and Medicare, then people might also spend less, because they'll feel they must save more.


At this point, we can't know for sure how much impact the stimulus will have. But it isn't likely to remedy the two biggest problems the economy faces. Its impact on confidence and spending will be minor, at best. And as I explained yesterday, its impact on the housing market will be negligible. As long as those two obstacles remain in place, the U.S. economy will have trouble growing at a much brisker pace.

Image Credit: Kevin Lamarque/Reuters

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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