U.S. stimulus a small patch for big economic hole

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - The $787 billion U.S. economic stimulus package may not be able to live up to lofty expectations, painting President Barack Obama into a policy corner once the money runs out.

With only a little under 7 percent of the stimulus actually paid out so far, it is a bit early to try to measure success. However, the White House is already fielding questions about whether another spending package will be needed.

One of Obama's top advisers said on Sunday that the current stimulus plan is "adequate to the task.

The problem is that while a sum of $787 billion may be vast, it pales in comparison to the more than $12 trillion in household wealth that has been wiped out since the recession began at the end of 2007.

That is why consumers saved a substantial portion of the government money they received. Now that the flow of government money to households is slowing, the concern is there won't be sufficient spending to power a consumption-driven economy.

"You don't want to create false expectations and I'm worried that they did," said Dean Baker, co-director of the liberal Center for Economic Policy Research in Washington.

Baker said it was unreasonable to expect a stimulus package to fill the gaping hole in household wealth or restore economic growth to pre-crisis levels. The best the White House could have hoped for was to cushion the blow from the recession, and by that measure the stimulus does appear to be working.

Personal disposable income rose sharply in May, and the gain was almost entirely due to stimulus money. But the saving rate shot up to 6.9 percent of income, and at $768.8 billion was the largest on record.

(For a graphic showing personal income, spending and saving rates, double click here)

The jump in savings is understandable considering households are grappling with severe losses in retirement accounts and home equity, but it dents one of the arguments the Obama administration made to support the stimulus.

Christina Romer, one of Obama's top economic advisers, has said that when credit conditions are tight, like they are now, consumers are more likely to spend rather than save extra money they receive from the government.

Romer and Jared Bernstein, Vice President Joe Biden's chief economist, argued in January that the stimulus package would lift real gross domestic product by about $433 billion, or 3.7 percent by the end of 2010.

A senior administration official said the White House still thinks that is a reasonable expectation, and dubbed the stimulus spending a "bridge" that would support the economy until the private sector is strong enough to stand on its own.

FRAGILE RECOVERY

To be sure, not all of the stimulus benefit was expected to come through consumer spending, although that does account for about 70 percent of the economy.