Stimulus' big boost to the economy? It already happened.

Americans hoping for a big economic boost from President Obama's economic stimulus programs got a douse of cold water Thursday: The White House's top forecaster said the largest impact of the stimulus on economic growth is probably in the rear view mirror.

That's the case even though unemployment continues to rise and many of the stimulus dollars haven't been spent.

"Most analysts predict that the fiscal stimulus will have its greatest impact on growth in the second and third quarters of 2009," Christina Romer, who chairs the President's Council of Economic Advisers, said in testimony prepared for Congress. "By mid-2010, fiscal stimulus will likely be contributing little to growth."

This view is shared by many economists, as Ms. Romer noted. But her assessment comes at a difficult time for both policymakers and for Americans in general.

Despite the massive $787 billion price tag, polls show that many Americans are skeptical about whether the stimulus is accomplishing much. Since the passage of the American Recovery and Reinvestment Act (ARRA), the nation's jobless rate has climbed higher than the White House and others had predicted.

Mr. Obama's approval ratings have sagged in recent weeks. Meanwhile, policymakers who back the stimulus have sent mixed signals. Some say not to judge the programs too soon, since most of the stimulus money hasn't been spent yet. But now Americans have been reminded that, in terms of gross domestic product (GDP), the impact of stimulus next year will be modest.

Political implications

All this has big implications politically and for the economy.

Many Democrats say it's time to consider more measures to help job creation or to cushion the hardships facing the unemployed. Republican critics say the meager gains from stimulus so far are evidence that Democrats’ policies aren't working. Against that backdrop, and with voters worried about any new programs that come with a high price tag, Democrats are wary of calling anything a "second stimulus."

For her part, Romer used her platform Thursday before Congress's Joint Economic Committee to argue that rolling back the existing programs would be a bad thing.

"A premature end to stimulus would be misguided," she said in her prepared testimony.

House Republican Kevin Brady of Texas voiced a range of concerns about the Obama policies just before Romer spoke. Although the stimulus aims to boost consumer spending and jobs, he said individuals and businesses now worry about tax hikes on several fronts starting in 2011.

"The government’s uncertainty and interference is quickly turning a 'rescue operation' into an anchor around the private sector’s neck," he said.

Both sides in this political debate know that jobs are the great need in the view of voters. And so far, their jury is out. In recent polls, fewer Americans say the stimulus is helping or hurting than say they see “no impact,” are unsure, or say that it’s “too soon to tell.”

Saving and creating jobs is key

The impact is also a matter of sharp debate among economists. Romer cited estimates that in the third quarter of this year, the economy would have had 1 million fewer jobs without the stimulus. Some $195 billion of the stimulus has been spent through the end of that quarter, she said.

The impact on jobs doesn't follow precisely the pattern of the impact on GDP. Economists see the stimulus contribution to GDP as greatest in the third quarter (Romer estimates a 2.7 percent upward bump). But the impact on jobs will be greatest next year, according to past estimates by Romer's team.

Some forecasters outside Washington say it's hard to discern a large impact on jobs so far from the collection of tax cuts, emergency assistance, and direct government spending.

Very little of the stimulus has gone into spurring investment by businesses so far, says Rajeev Dhawan, who directs the forecasting center at Georgia State University in Atlanta. "That is the only way we be able to sustain job growth down the road."

He describes some components of the ARRA as needed help for an economy in distress: aid to cash-strapped local governments and the unemployed. Without those programs, he says layoffs by state and local governments would have been higher.

Among the measures Democrats are considering: a tax credit for firms that hire, and further extensions of jobless benefits and of tax credits to spur home-buying activity.

Rather than a second stimulus, Mr. Dhawan says the economy's big need is to clean up banks so they are better able to finance business. The fix might involve acknowledging bad loans on their books, selling these assets to willing buyers, and getting fresh capital so they can lend again.

For job creation, he says, "the credit has to flow properly."

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