Did the Stimulus Work? And Other Lessons of History

On this day in economic and financial history ...

On Feb. 17, 2009, after weeks of fevered negotiations following the inauguration of President Obama, the American Recovery and Reinvestment Act -- most commonly known as the stimulus -- was signed into law in Denver. The stimulus proposed to inject hundreds of billions of dollars into the flailing American economy through a combination of increased government spending and tax cuts, in an effort to halt a months-long slide into recession before it became another Great Depression. Originally slated to cost $787 billion, the stimulus' impact on the deficit is now thought to total $831 billion. Four years after it became law, the stimulus has provided $291 billion in tax breaks, $250 billion in project and operational funding, and $244 billion in entitlement benefits.

Has all this funding worked? Less than a month later, the Dow Jones Industrial Average (DJINDICES: ^DJI  ) bottomed out and had more than doubled from its crisis lows within four years of the stimulus' passage. The Congressional Budget Office found that the stimulus added as many as 2.1 million jobs in the fourth quarter of 2009, increasing the nation's economic output by 3.5% and lowering the unemployment rate by as much as 2.1%. Time correspondent Michael Grunwald, author of The New New Deal, pointed out to The Washington Post's Ezra Klein:

We dropped 8.9% of GDP in Q4 2008. We lost 800,000 jobs in January 2009. We passed the stimulus. And then the next quarter we saw the biggest jobs improvement in 30 years. ... It's got the biggest middle-class tax cuts since the Reagan era. It prevented 7 million people from falling behind the poverty line.

On the other hand, a pair of working papers from the conservative Mercatus Center at George Mason University claim that the stimulus distorted normal market incentives. For example, some contractors were forced to use costlier materials to make it appear that a larger amount of stimulus money was being put to use, or funding might have been directed toward the purchase of useless tools instead of for the retention of employees. There are bound to be some flaws in even the most well-intentioned programs.

The tech index heats up
On Feb. 17, 2000, the Nasdaq Composite (NASDAQINDEX: ^IXIC  ) raced toward its ultimate dot-com apex, closing above 4,500 points for the first time in its history. That day, the index finished with a 2.7% gain to close at 4,549, with a then-record 2 billion shares traded on the Nasdaq exchange. It had taken the Nasdaq a year to grow from 2,500 points to 4,500, and only four and a half years to grow from 1,000 to its Feb. 17 close.

However, the cracks were already beginning to show in this booming market. The Dow had peaked a month earlier. On Feb. 17, it sagged under the weight of another warning from Federal Reserve Chairman Alan Greenspan, who told the House Banking Committee that "profoundly beneficial forces driving the American economy to competitive excellence are also engendering a set of imbalances that, unless contained, threaten our continuing prosperity." At the close, the Dow was already 10% lower than its January peak. In less than a month, the Nasdaq would hit its all-time high, a level of just over 5,000 points that has been far out of reach ever since.

Whose wireless is it, anyway?
On Feb. 17, 2004, the U.S. wireless landscape shifted under Verizon's feet when Cingular Wireless agreed to acquire AT&T (NYSE: T  ) Wireless for $41 billion. This vaulted the new Cingular into the lead for American market share, ahead of Verizon and the 46 million subscribers it served at the time.

The Cingular deal brought weeks of fierce buyout jousting to a close, cutting off Britain's Vodafone and its potential $38 billion bid. Either option was likely to have brought regulatory scrutiny, as Vodafone was (and remains) the 45% owner of Verizon Wireless, with Verizon itself owning the rest. However, it was Cingular, then jointly owned by SBC Communications and BellSouth, that posed greater regulatory risk -- although this risk turned out to be overstated, as the deal went through without a hitch.

The deal also brought greater security to the faltering AT&T Wireless, which had endured higher levels of customer defections than its competitors following the creation cell-phone portability regulations, which allowed users to retain their numbers when they switched services. AT&T Wireless' independent status also put it at a disadvantage against Cingular and Verizon, both of which could reach into the deep pockets of their telecom parents.

Today, Cingular is known as AT&T Wireless. It is now a wholly owned subsidiary of the new AT&T, after SBC's acquisition of the original AT&T a year later, and its acquisition of BellSouth at the end of 2006. Since its merger, AT&T Wireless has consistently remained atop the U.S. market. At the end of 2012, it served 107 million subscribers to Verizon's 98.2 million subscribers.

Start me up
The first working electrical automobile starter was installed in a Cadillac on Feb. 17, 1911. This device, invented by Charles Kettering, is something drivers around the world today take for granted, but it was revolutionary at the time.

The autos built in those days came with crank starters, which could pose a real physical danger to their users. Cadillac founder Henry Leland knew of this danger firsthand, as he'd lost his good friend to a tragic crank-starting accident. Leland's friend, Byron Carter, had suffered a broken arm and jaw while helping a woman crank her car. The crank-starter had gone haywire when the car sputtered to life, tearing the mechanism violently from his hands. Carter suffered complications from his injuries and died when his weakened immune system succumbed to pneumonia. Unfortunately, this was not an isolated problem with early automobiles.

Kettering was then primarily known as a brilliant researcher for National Cash Register (NYSE: NCR  ) . In his five years with the company, he'd eliminated hand-cranking mechanisms for cash register operation and had also created the earliest receipt-printing registers as well as the earliest systems of remote credit charging. This sparkling resume brought him to Leland's attention, and he first began work on an electrical ignition system for Cadillac in 1908. Carter's death in 1910 refocused Leland's and Kettering's energies on the electrical starter, which was completed rather quickly for such an important advancement.

The success of this electrical starter prompted Kettering to found Delco, which was soon absorbed by eventual Cadillac parent General Motors. Kettering became the vice president of GM's research subsidiary in 1920 and held the position for the next 27 years. Kettering's groundbreaking work on electrical ignitions and starters has made starting your car as easy and harmless as turning a key -- or, in today's newest cars, pressing a button.

A record-breaking Bug
On Feb. 17, 1972, the 15,007,034th Volkswagen Beetle rolled off its assembly line. That number set a new record for auto production that had been held by Ford's (NYSE: F  ) Model T since 1927. Like the Model T, the Beetle was a symbol of inexpensive reliability, freedom on four wheels for the masses. Also like the Model T, the Beetle became an iconic symbol of its era, the Everycar for the times that were a-changin', as Bob Dylan had so eloquently put it. While the Beetle could never hope to match the Model T's ubiquity (the vast majority of cars in the 1910s were Ford models), it's survived in the public consciousness even longer. You might even see an original Beetle motoring down the highway every now and then, more than 50 years after they became popular.

The Model T's production totals were eventually revised upwards to the 16.5 million range, but Volkswagen kept cranking out the stubby, stout original-model Beetles until 2003, with a final production total of 21.5 million cars. That makes the Beetle, which was first built in 1938, the longest-running and most-manufactured single vehicle design in automotive history.

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Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 17, 2013, at 4:10 PM, eddietheinvestor wrote:

    I find this post to be far unconvincing. After a strong market correction, the Dow obviously would go up. And the Dow is only 30 stocks out of countless stocks on stock exchanges; the Dow is not always indicative of the country's fiscal health.

    I find it disturbing that Planes calls a dissenting point of view (Mercatus) conservative in order to discredit it, but neglects to point out the clear liberal bias of Michael Grunwald, Time, and the Washington Post. It was Grunwald, for instance, who demonstrated his disdain for conservatives and said on the Huffington Post (another liberal media establishment) that Republicans have no dedication to their values and are not even able to figure out what their values are. So why does Planes quote this person an an objective source when it's clear that all things he says will favor Obama and the stimulus? Quoting Grunwald on the value of the stimulus is no more helpful than quoting Hannity's position on the stimulus.

    I don't find this post persuasive at all.

  • Report this Comment On February 17, 2013, at 9:26 PM, zman4money wrote:

    What I find interesting is that president obama's chief economic advisor said that unemployment would not rise above 8% if it was passed. I guess now we can view this statement as propaganda for congress to pass the stimulus package. Now we are a trillion more in debt while unemployment once surpassed 10%. The package might look like it saved America, but its projections were completely wrong. I think we could have done just as good without a trillion more in debt

  • Report this Comment On February 18, 2013, at 1:23 AM, whereaminow wrote:

    --->There are bound to be some flaws in even the most well-intentioned programs.<---

    Four years of college and that's the best you can give me Alex?

    The state of economic theory among Motley Fool journalists has reached an all time low.

    David in Liberty

  • Report this Comment On February 18, 2013, at 2:59 AM, jrainspe wrote:

    Just look at history, e.g. the great depression. Hoover tightened the belt and, although that didn't directly 'cause' the depression, was instrumental in making it worst and longer.

    Look at all the economies around the world during the recovery from that great depression, you will see that the countries who were the last to start 'stimulus spending' were also the last to recover from the depression.

    I have been unable to find any studies on the longevity of the economic recovery for individual countries versus the amount or timing of their spending. I think it would make a good study, but then what do I know.

  • Report this Comment On February 18, 2013, at 1:43 PM, systemBuilder wrote:

    Only $395,717 per job. But, lots and lots and lots of bonuss for the Wall Street fatcats. What's not to like????

  • Report this Comment On February 25, 2013, at 9:33 AM, queenmilk wrote:

    The stimulus has worked in the fact that the auto makers are still one of the biggest employers in the US and other countries. The Schaeffler company, a German family owned company that manufactures ball bearings as well as other auto parts, is constantly adding to its work force. JObs tell us that the stimulus has worked.

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