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FEBRUARY 19, 2009
Market Analysis, Research & Education
A unit of Fidelity Management & Research Company
Stimulus Scorecard: Evaluating the Plan
By Dirk Hofschire, CFA
ashion is highly daunting. This is one reason whyeconomists generally agree that government stimuluscan make a dierence during an economic downturn,but they tend to have major disagreements aboutthe best manner in which to provide that stimulus.Similarly, the political debate has tended to center onideological generalizations avoring either tax cuts orgovernment spending, but the act o the matter isthere are many dierent types o each approach thatoer a variety o expected results. There is simply noconsensus about a silver bullet or single solution thatprovides iron-clad success in any given situation.MARE analyzed the components o the stimuluslegislation according to the ollowing criteria. First,we evaluated how quickly the stimulus might enterthe economy. We dened a program as “ast” i it willhave at least some o its impact in 2009, with the vastmajority o the spending occurring within the nexttwo years. Second, we analyzed how much impactthe spending will have on economic growth. Wher-ever possible, we assigned a multiplier to a programusing estimates rom Moody’s Economy.com, whereChie Economist Mark Zandi’s work was widely utilizedby Congress as an input or the new legislation. Amultiplier greater than one means the expectedeconomic benet o the spending is greater than theactual dollar amount spent, and implies a positiveeconomic “bang or the buck.” Finally, we assessedthe degree to which certain programs may have thepotential to boost long-term economic growth. Thisis the most subjective portion o the analysis, andprobably the least important rom a stimulus per-spective, but it aims to provide some idea o howitems such as research—i executed eectively—may lit an economy’s productivity rate over time.
Evaluating the programs
Using the above criteria, we estimate that nearlyhal o the expenditures in the legislation undhighly stimulative programs that are both rela-Does the composition and the size o the U.S. govern-ment’s new economic stimulus legislation provide theright ramework or success?
Measuring the plan’s effectiveness
To provide a shot in the arm to an ailing economy, astimulus package must possess two primary character-istics. First, it must enter the economy quickly. Second,it should have a large multiplier eect—the economicimpact or each dollar spent that is magnied as themoney moves through the economy. Additionally,most economists eel the components o a stimulusprogram should be temporary in nature so that theycan be easily unwound once the economy recovers.One diculty is that there are a limited number o gov-ernment spending and tax-cut categories that meetall o these criteria. As a result, providing hundredso billions o dollars o stimulus in a ast and eective
The $790 billion stimulus package is not perect
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nor a panacea, but it generally has the composi-tion to make a positive dierence or the ailingeconomy.Though some provisions do not meet the stan-
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dard deinition o economic stimulus, many o theprograms should enter the economy relativelyquickly and provide a solid “multiplier eect”that boosts the knock-on impact o governmentspending.The size o the package represents a middle
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ground between those who propose doing noth-ing (a risky viewpoint given the gravity o theeconomic crisis) and those who support spendingmuch more (which may heighten the risk o thegovernment experiencing iscal problems).
    k   E   y   t   a   k   E   a   w   a   y   S
 
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Inrastructure spending on already- 
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planned state highway projects— 
Spentrelatively quickly and creates jobs.The other hal o the package contains variousgroups o spending categories whose impact ortiming is less certain (See Table B in Exhibit 1).This does not imply that the spending on theseprograms will not be stimulative, but simply thatthere is not enough inormation to estimate theirsuccess. Some sample highlights include:
Alternative minimum tax (AMT) relie— 
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Hits theeconomy relatively quickly, but has a low expectedmultiplier eect (less than one), in part because ithelps middle-income taxpayers who did not previ-ously pay the tax. Middle-income consumers maytively speedy, in addition to having expectedmultipliers greater than one (see Table A in Exhibit1, below).
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A sample list o this group includes:
Aid to states— 
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Direct assistance to states, in-cluding Medicaid benets, is quick and has ahigh multiplier because it is used or spend-ing that otherwise would have been cut.
Payroll tax credits— 
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Hit paychecks quicklyand exclude the wealthiest taxpayers whomay be more inclined to save the money.
Aid programs such as ood stamps and unem- 
•
ployment benefts— 
Disbursed quickly andgo to cash-strapped lower income consumerswho are most likely to spend their income.
Cost($ Billions)MultiplierSpeedPotential Long-TermEconomic ImpactDirect Aid to States
$147 1.36FastLow
Payroll Tax Credit
$116 1.29FastLow
Extension/Increase inUnemployment Benefts
$41 1.64FastLow
Highway InrastructureDevelopment
$29 1.59FastMedium
Increase in Food Stamp Benefts
$20 1.73FastLow
Alternative Minimum Tax(AMT) Relie 
$70 0.48FastLow
Medical Record ModernizationIncentive Program
$18 ?SlowLow - High
Public Transit Improvements &Railway Grants
$16 1.59Slow - FastMedium
Renewable Energy Tax Cuts
$13 ?Slow - MediumLow - High
NIH Biomedical Research
$10 ?SlowLow - High
More Eective/EfcientLess Eective/Efcient orMore Uncertain
Sample o Major Provisions in U.S. Stimulus Bill
Multipliers rom Mark Zandi’s U.S. House Committee on Small Business testimony on July 24, 2008. A multiplier o 1.36 implies that or every $1 o spending,$1.36 o economic activity is generated. Source: Wall Street Journal, Moody’s Economy.com, FMRCo (MARE), House Committee on Rules, Joint Committee onTaxation, Congressional Budget Oce.
EXHIBIT 1: Individual programs included in the stimulus bill can be broadly grouped into two categories: Those with highmultipliers and ast economic impact, and those with low multipliers, vague time horizons or uncertain eectiveness.
AB
 
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be inclined to save rather than spend their tax cuts(as they generally did with the tax rebate in 2008).
Spending on new projects— 
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Includes initiativesdesigned to increase productivity in variousindustries, including computerizing medicalrecords, building a national electrical “smart” gridand providing broadband to more communities.Spending is likely to take years, with a potentialboost to long-term growth but also a high de-gree o uncertainty about eventual multipliers.
Other inrastructure projects— 
•
Includes every-thing rom constructing new schools to publictransit improvements. Timing is highly uncertainor most o these projects, though inrastruc-ture spending generally has a high multiplier.
Renewable energy and energy efciency— 
•
In-cludes tax cuts and grants or renewableenergy investments, in addition to makingederal buildings more energy ecient. Tim-ing and expected impact vary widely.
Spending on education and research— 
•
Whilesome o this money may be spent relativelyquickly, the benet to the economy is dicult tomeasure and may play out over many years.Overall, the components o the stimulus plan repre-sent a broad mix o programs that are likely to have avariety o dierent eects on the economy over dier-ent periods o time. On the one hand, roughly hal o the package is airly identiable as programs that arerelatively quick and stimulative, and will likely providetheir biggest boost to the economy over the next twoyears. Most o their impact will be in mitigating theworst o the economic downturn. On the other hand,the other hal o the package is less certain. There aresome programs that are timely but have lower expect-ed multipliers (AMT relie); there are some programsthat have higher expected multipliers but whosetiming is more uncertain (inrastructure spending); andthere are many programs that on paper have a highpotential to provide long-term economic benets butwhose success and timing remain highly uncertain.For many o these longer-term programs— includ-ing increases in research and education, modernizingthe electrical grid, supporting alternative energy, andupgrading medical-records technology— the objec-tive is clearly not limited to short-term economicstimulus. Their ultimate success will be dependent onthe details o their implementation. Many o these areworthwhile causes that on paper have the potential toexpand the productive capacity o the economy overthe long-term. However, these categories generallydo not to t the classic denition o “stimulus,” andtheir ultimate success will be known only in hindsight.
Sizing up the plan
There has been much debate over the size o the newplan. On one extreme o the ideological spectrum,there are opponents to any scal stimulus at all. Argu-ments or this point-o-view contend that governmentprograms may lead to waste and distortion o theree markets that provide the impetus or long-termeconomic growth. There is certainly some merit to thispoint. However, in a moment o extreme nancial andeconomic crisis, the key risk to doing nothing is thatthe ree market’s sel-correcting mechanism may beso impaired on a temporary basis that the downtrendnegatively reinorces itsel until it becomes a completecatastrophe. At those critical moments, the govern-ment may be the only economic entity that can stemthe momentum o defationary orces and restore con-dence [See related MARE article,
Obama’s Economic Challenge: The Velocity of Hope
]. Given the gravity o the situation today, doing nothing is a risky strategy.
In a moment o extreme inancial and economic crisis, the key risk to doingnothing is that the ree market’s sel- correcting mechanism may be so impaired on a temporary basis that the downtrend negatively reinorces itsel until it becomes a complete catastrophe.
A stronger argument or limiting the size o a stimu-lus program is that government spending todaywill necessarily borrow rom uture growth, in thesense that higher revenues will have to be raisedin the uture to pay or current expenditure. This isan even bigger problem today, with the U.S. gov-ernment already running a decit o more than $1trillion and depending on oreigners to nancemore than hal o its outstanding debt.
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