Does the US need more economic stimulus, or less?

The US barely generated any private sector jobs in May. Is the $787 billion economic stimulus not big enough, or is it not working at all?

With a massive federal stimulus program running at full speed, the US economy barely generated any private sector jobs in May – just 41,000 to be exact.

The tepid job numbers raised a sobering question: Is that $787 billion stimulus not big enough, or is it not working at all?

The answer may be neither of those extremes. For now, Congress is moving toward neither a massive new boost in federal stimulus nor a retreat from the Recovery Act that President Obama signed early in 2009.

But the debate about what to do – and whether other options should be considered – is a loud one for both economic and political reasons.

Politically, Mr. Obama's approval ratings and this fall's elections hinge crucially on jobs and the federal budget, not just on things like oil-spill response or health-care reform. Among economists, there's uncertainty both about where the economy is headed and about what policies might help.

What's at stake is whether the recovery from recession will be so weak that unemployment remains high for years. The economy appears to be starting to add jobs after two years of decline. But in May, some 411,000 new jobs were temporary census positions. In the private sector, small employers are still largely on the sidelines.

The economy could even fall back into recession later this year, although most economists don't expect such a "double dip" to occur.

"My best guess is that we'll have a continued recovery, but it won't feel terrific," Federal Reserve Chairman Ben Bernanke told ABC News on June 7. "It's not going to be fast enough to put back 8 million people who lost their jobs within a few years."

Some say more fiscal stimulus is the obvious answer, pumping money into a still-slack economy. Others say the answer is the opposite – to start controlling deficit spending by the government, to create a better climate for economic growth. A middle option is some version of "stay the course."

"We Need Bigger Deficits Now!" is the rallying cry that Brad DeLong, an economist and former Clinton administration official, used as a blog headline this month.

The government has low borrowing costs right now, he argued, "and because of high unemployment the benefits of boosting government purchases and cutting taxes right now are exceptionally large."

Other economists, especially on the political left, agree that more stimulus is needed. Otherwise, they argue, the economy will have a needlessly high jobless rate for several years.

Yes, deficit spending will eventually need to be addressed, they say. But low interest rates signal that bond investors are not worried about that now.

What kind of stimulus would help? Some call for new spending that creates jobs, especially in areas where the nation needs to make long-term investments anyway. Others say that more tax cuts (a big part of the initial Obama stimulus) would do the most to spur private-sector activity and optimism.

The theory behind fiscal stimulus is that, in times when the economy is weak, a boost in the form of public spending or tax breaks will help revive overall demand. At such times, proponents say, each dollar spent by the government will boost gross domestic product (GDP) even more as the stimulus ripples through the economy in a so-called multiplier effect.

Critics say that the size of those multipliers may in fact be negligible. "All that is left is a higher level of government debt, creating slower economic growth," economist Lacy Hunt, of Hoisington Investment Management in Houston, warned in a report last year.

This view holds sway with many Republican lawmakers. And Europe's crisis over sovereign debt burdens has made Democrats wary of adding to federal deficits.

"Markets are beginning to perceive that the large debt burdens in various countries worldwide could very well derail the global economic recovery," says a recent report by House Budget Committee Republicans. "The U.S. has not been immune to this turmoil, as the stock market has fallen 10 percent from its most recent peak."

When Mr. Bernanke testified to Congress on June 9, he faced repeated questions about how the US can avoid a Greece-style debt crisis – although some Democrats also asked him to talk about the risks of withdrawing stimulus too soon.

A year after the Recovery Act began, the new money from government hasn't translated into rising private-sector incomes. (When government transfers are left out, personal income fell last year and remains near its late-2009 low point.)

If some want more stimulus and others less, the prevailing view in Washington appears to be a middle one. That means no big cutbacks in federal spending right away, while any additional stimulus efforts could be small in scale.

Key arbiters of stimulus policy now are moderate Democrats in the Senate. On June 16, they sided with Republicans in a vote that effectively killed a bill designed to support the economy via business tax breaks, help for the long-term unemployed, and aid to states. That sent backers of the measure scurrying to scale back its cost, which by some estimates would have increased the federal deficit by about $80 billion over the next decade.

In early 2009, lawmakers could agree on a big stimulus. Since then, times have changed.

The word "stimulus" isn't wildly popular with voters, so new money is being considered in small chunks, and often with future spending cuts attached.

But by one tally, some $61 billion in stimulus add-ons have already been passed, and another $189 billion are under review. (The $787 billion cost of the original Recovery Act has also expanded to a current estimate of about $860 billion.)

"I'd sure feel better if we had a little more stimulus," says Gus Faucher of Moody's Econ­omy.com in West Chester, Pa. But with federal deficits rising, he favors the kind of modest stimulus Congress is considering, plus steps to lay the groundwork for curbing deficits.

Right or wrong, that approach may fit the public mood. Jobs are the top concern, and one recent poll found a majority of Americans believe the stimulus has helped.

But Americans are also worried about unchecked deficit spending.

"We need to show that within a few years we're going to go clearly to a path where that debt-to-GDP ratio is stable," Bernanke told lawmakers. But for now, "the recovery is still pretty fragile and may need more assistance."

Related:

Don't call it a stimulus package: Obama wants another $50 billion

Jobs numbers for May squelch some economic optimism

In Ohio, Obama says his policies have created jobs. Is that true?