Did the Stimulus Work? And Other Lessons of History: Ford Motor Company (F) and More

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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.

Ford Motor Company (NYSE:F)Has all this funding worked? Less than a month later, the Dow Jones Industrial Average 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 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.

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