President Obama’s $447 billion American Jobs Act is all about inspiring confidence in an economy that sorely lacks it. Like the last economic stimulus—and that’s what it is, even if politicians can’t bear to invoke the word—this one is intended to awaken the nation’s animal spirits so businesses invest, consumers spend, and the economy once again finds momentum in a virtuous cycle.
The trouble is that many Democrats think the plan isn’t big enough to make a difference, while many Republicans see it as unaffordably big. These perceptions about the government’s ability to solve problems matter greatly. Economies run on faith—in the future, in the system, in the people in charge. When that faith disappears, as it has now, hiring, investment, and shopping stall.
“Sentiment can be so harmed that businesses, consumers, and investors freeze up, turning a gloomy outlook into a self-fulfilling prophecy,” Mark Zandi, chief economist of Moody’s Analytics, wrote on Sept. 9, the day after Obama’s speech to Congress announcing the stimulus. “This is one of those times.” And that’s the most stubborn challenge Obama and Congress are up against. If most Americans think the plan won’t work, their pessimism could ensure that it doesn’t, no matter what the numbers show. This is especially true because it could take several months or longer before many people start to see the effects of all that government money sloshing around.
In ordinary times, confidence is mostly just a consequence of fundamental factors in the economy—revenue, interest rates, employment statistics. In troubled times such as these, it can become the tail that wags the dog. On the plus side, the tone of Obama’s speech was more of a confidence-builder than some of his recent efforts, and the proposal itself has components that should be popular with Republicans, such as an extended and enlarged payroll tax cut. Zandi wrote that “the plan would go a long way toward stabilizing confidence, forestalling another recession, and jump-starting a self-sustaining economic expansion.”
Still, early signs are that Obama has not quite succeeded in rallying a skeptical nation. The Gallup Tracking Poll showed no boost after the speech. Gallup’s latest three-day average, covering Sept. 9-11, showed Obama’s post-speech job approval rating at 42 percent and his disapproval rating at 49 percent. Those numbers are almost identical to his ratings at the end of August, just before the speech (42/50). Only 40 percent of respondents to a Bloomberg National Poll said the Obama initiative would help lower the unemployment rate; 51 percent said it would not help.
Obama’s plan was designed to be business-friendly. More than half of it is tax cuts, including employee payroll tax cuts of $175 billion and employer payroll tax cuts of $65 billion. There’s also infrastructure spending of $50 billion and extension and reform of unemployment insurance benefits totaling $49 billion. Yet business reaction was lukewarm. “I don’t know if last night is the first indicator of moving in the right direction,” Ford Chief Financial Officer Lewis Booth said on Sept. 9 at a UBS investor conference in London. “It’s too early to tell.” Says Newmont Mining CEO Richard O’Brien, “What CEOs really need to hear is that we’re not just looking at one-time job creation but an environment into which longer-term job creation is a real possibility.” Jen-Hsun Huang, CEO of Santa Clara (Calif.)-based Nvidia, is a bit more optimistic: “Half a trillion dollars of stimulus to promote job growth is surely not a bad thing.”
If Congress passes the whole package, it could raise 2012 economic growth by an estimated 1 to 1.5 percentage points. But Congress almost certainly won’t do that, says Neil Dutta, an economist at Bank of America Merrill Lynch. The most useful thing Obama did, says Dutta, was “shift the tone of the debate toward stimulating the economy aggressively.” At a minimum, he says, Obama might be able to push through enough stimulus to offset tax cuts scheduled to expire at the end of the year.
Economists’ ordinary M.O. is to calculate the impact of a stimulus package by applying multipliers—how much bang for the buck typically results from any given form of spending or tax-cutting. Those historical multipliers aren’t useful guides if confidence is in a rut. None other than Federal Reserve Chairman Ben S. Bernanke suggests that confidence is a problem by itself, not just a symptom of other woes. “Even taking into account the many financial pressures that they face, households seem exceptionally cautious,” he said at a luncheon in Minneapolis on Sept. 8.
Hence the importance of the soft stuff. “Effectively persuading people that the only thing they have to fear is fear” could make a real difference in getting the economy back on track, says Joel Prakken, chairman of Macroeconomic Advisers, a forecasting company. “Uncertainty abounds these days.” A further complication is that many conservative Republicans are flat-out opposed to stimulus measures, fearing they will increase the risk of indebtedness and default. When the nation’s mood is this low, nothing’s easy for the Confidence-Builder in Chief.