The Unemployment Rate and the Economic Stimulus

Last week, we learned that the United States economy lost another 467,000 jobs in June and the unemployment rate increased to 9.5 percent. While the rate of job loss in June is less than the average in the first quarter of 2009, the unemployment rate is at its highest level since August of 1983.  (The figure below shows the unemployment rate since 1970.  In terms of the unemployment rate, the recessions in the mid-1970s and early 1980s look similar to the current recession. The recession in the early 1990s and at the turnoff the century look relatively mild compared to these three episodes. )

Nearly everyone would agree that the current administration inherited a very weak economy and that this is not President Obama’s economy (yet).  Thus, all that is wrong with the economy cannot be attributed to the current administration.  However, we can ask to what extent has the nearly $1 trillion stimulus package helped the economy.  In my view, it has done little to help the economy.  I will discuss this in more detail below.
Back in January of 2009, the administration’s economic team released a document where the discussed how the stimulus package would help the economy.  In document was the figure depicted below.

According to this chart, the authors argued that the stimulus package would push the unemployment rate down to about 8 percent by June of this year.  Without the stimulus package, the unemployment rate would be close to 9 percent.  The unemployment rate has been above what the economic team forecasted in every month. Recently, Vice President Biden stated that the administration did not realize the economy was in such bad shape.  I find this is statement odd since on the campaign trail both President Obama and Vice President Biden stated that this was the worst economy since the Great Depression.  If this was the argument then, how could they say they did not fully grasp the severity of the recession? 
In my view, this stimulus package suffers from one of the classic problems of using government spending to stimulate the economy.  It takes too long to get spend the funds.  Figure 3 below shows that very little of the $878 billion stimulus has been paid out. Only $56.3 billion has been paid out; that is a little more than 6 percent of the $878 billion stimulus package.  In fact, only about 18% ($157.8 billion) is available for use.  In a $14 trillion dollar economy, an increase in government spending of less than 0.5 percent of GDP is unlikely to stimulate the economy. 

Thus, it should be of little surprise that the unemployment rate continues to rise even though the administration passed stimulus package to boost economic activity. However, since most the increased spending occurs later this year and in 2010, we should not expect much of a boost from the stimulus package now.  In another blog, we will look in greater detail at the stimulus package ask: Will the economy get a boost when the rate of spending picks up?