As Obama Signs $787 Billion Stimulus, the Question Is, Will it Work?

The roughly $787 billion shot in the arm for an economy in crisis is proof of the power of Barack Obama's salesmanship, signifying a key victory in his less-than-a-month-old presidency. The package of tax cuts and spending was delivered to the White House in time for the Presidents Day deadline he and congressional Democrats set, and Obama is signing the bill in Denver today.

But even as lawmakers hammered out a final compromise after long, frenzied weeks of negotiations, tough realities emerged. Most economists believe the American Recovery and Reinvestment Act will be strong medicine, but not a cure, for the crisis. They caution recovery won't come overnight. And they warn that if and when the economy perks up, the government still must confront enormous fiscal challenges.

One expert frequently summoned to Capitol Hill for his views is Mark Zandi, chief economist for Moody's Economy.com. He calls the stimulus a "reasonably good, helpful plan" that will, in fact, result in more jobs. Democratic architects of the plan estimate that 3.5 million jobs would be saved or created, or 100,000 fewer than the number slashed since the crisis began.

Zandi, though, was among economists pushing for a trillion-dollar-plus injection, and he worries the new package "is not big enough to jump-start the economy sufficiently. To some degree it's laudable that lawmakers would get it all together as quickly as they did, but at the end of the day, it probably won't be enough. The stimulus will have to be visited again late this year or in 2010."

At best, the stimulus will give a vital boost to the flagging economy, but it won't erase the recession, he says. With gross domestic product, employment, industrial output, and retail sales all falling sharply, even the stimulus might not be enough to halt the slide in an economy that appears to be headed toward the worst downturn since the Great Depression.

The gargantuan package is a mix of new spending, tax relief for individuals, tax incentives for business, and help for the jobless. Billions will go to infrastructure, science, energy, and education. The bill, of course, is just one leg of a three-legged stool. The others are Treasury Secretary Timothy Geithner's just-announced shoring-up of the financial system and forthcoming foreclosure mitigation.

For President Obama, the stimulus was a must-win battle. After he was sworn in, Obama threw himself into selling the plan, chanting "bipartisanship" as if it were a mantra. Efforts to woo Republican lawmakers were met with a frosty reception. He then dived into Plan B, using his first prime-time news conference in the East Room of the White House as an elegant bully pulpit. "I can't tell you for sure that everything in this plan will work exactly as we hope," he told the nation, "but I can tell you with complete confidence that a failure to act will only deepen this crisis."

His hard talk, delivered to a TV audience of nearly 50 million, was underscored by road trips to places where the pain is acute. He hit America's heartland, touting the stimulus in Elkhart, Ind., a city reeling from 15 percent unemployment, and Fort Myers, Fla., an overbuilt enclave whipsawed by home foreclosures. There, a weeping homeless woman, telling Obama she lived in her car, begged for assistance in plain, tangible terms. "We need our own kitchen and our own bathroom," she said. "Please help."

Last week, Obama kept up such campaign-style events, hitting Springfield, Va., before a tentative deal was struck by Senate and House negotiators. Then it was on to Illinois, to visit Caterpillar, a heavy-equipment manufacturer planning to ax 20,000 jobs. On the same day, Obama's bipartisan efforts took a blow when his latest pick for commerce secretary, Republican Sen. Judd Gregg abruptly withdrew.

Many GOP lawmakers dug in their heels. Senate Minority Leader Mitch McConnell, saying that the much-touted tax cut for middle-class workers adds up to $7.70 a week, condemned the package. "The taxpayers of today and tomorrow," he insisted, "will be left to clean up the mess." Over in the House, Republican Mike Pence of Indiana attacked the stimulus as a "long wish list of big government spending that won't work to put Americans back to work."

But three of the 41 Republican senators effectively salvaged the stimulus by aligning with Democrats. Sen. Susan Collins, a moderate Republican from hard-hit Maine and a key figure in the negotiations, praised the compromise that preserved infrastructure spending but kept the bill under $800 billion. "Today we have shown that, working together, we can address the enormous economic crisis facing our country," she said.

At the Brookings Institution, a Washington think tank, economist William Gale said the best hope is that the stimulus will mitigate or cushion the severity of the current downturn. While not a trivial thing, it's unrealistic to expect a complete halt to the slide. "Compared to not doing anything, the stimulus has got to help," he says, "because if we don't do anything, we're going to be in this downward, self-reinforcing spiral." He warns, however, that it will take time to work. "We're not going to stop the economy from getting worse in the short run."

Among top economists, the consensus is that the economy will begin to rebound during the third quarter, meaning sometime between July and September, according to Blue Chip Economic Indicators, a respected publication in Kansas City, Mo. Some forecasters are calling for six more months of pain, hoping things will level off a bit after that, Gale says. Doomsayers fret about Japan's "lost decade" of the 1990s, when stock values plummeted, a real estate bubble burst, and 10 years of economic malaise ensued.

Zandi thinks the economy could regain its footing by 2010, but he wants to gauge the psychological impact of this shot in the arm, combined with the other massive fixes ahead. He wonders whether fears will abate enough so that consumers resume spending, employers start hiring, banks unleash loans, and investors renew their faith in the markets. His rules of thumb: The difference between a bad economy and a recession is a lack of confidence. The difference between a recession and a depression is a lack of faith. A rescue package, he says, is "about more than dollars and cents. It's about shoring up fragile confidence."

Economists may love numbers, but they turn to the alphabet to chart economic recoveries. Some look like V's, with a sharp upward trend after a steep drop. Others look like U's, with a stagnant period preceding a gradual recovery. Then there are those, like Japan's, that look dangerously like L's, where the plunge is followed by an extended struggle to get better.

So while Obama may well flash a V at what stands to be his first major legislative victory, few experts think the U.S. economy will behave accordingly.

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