Following up on our coverage of state and federal budget issues: we’ve noticed that there seems to be some confusion over the difference between the Stimulus and the bank bailouts.
Part of the American Recovery and Reinvestment Act of 2009– better known as the Stimulus– gave state governments extra funding to help deal with the giant holes in their budgets caused by the financial crisis. With the economy still in rough shape, President Obama has urged Congress to pass additional funding to help states. Politicians and media types have referred to this as a “bail out” for state governments. That might be a fair description, but the words “bail out” have left a lot of people thinking that the Stimulus is connected to TARP and the bank bailouts.
It actually is not. To help clear things up, here’s a short description of each program.
TARP (Troubled Asset Relief Program) – the bank bailout
This was the bank bailout (or part of it anyways). TARP allowed the Treasury to buy or insure up to $700 billion in “troubled assets” from banks and other financial institutions. Technically it involved the Treasury buying subprime mortgages, mortgage backed securities, and derivatives, but in a lot of ways it worked more like an enormous loan to banks. In exchange for buying the junk nobody wanted, the Treasury got shares in the companies – once the crisis had passed the companies could buy back these shares, thereby paying off their TARP obligations.
The program seems to have worked. TARP was originally expected to cost the government $356 billion, now the Treasury expects it will only cost around $89 billion. That may sound like a lot, but it’s 42% less than the cost of bailing out the savings and loan industry in the 1980’s. Banks have been rushing to pay off the TARP money, in part because it came with limits on executive compensation. Or in some cases banks didn’t need the money– for example PNC bank appears to have used its TARP money as a loan to purchase National City bank at a bargain price.
Unfortunately, as Rolling Stone writer Matt Taibbi notes, TARP was only a part of the financial bailout. There were separate programs through the Federal Reserve to bail out AIG and Bear Stearns, to buy even more “troubled assets,” and make trillions of dollars worth of low interest loans. (For now, only the Fed knows where most of this money went.) And losses to the government from Fannie Mae and Freddie Mac are projected to be $370 billion over the next ten years.
The bailouts have also been surrounded by controversy. Records show that 17 banks which had received TARP funding — including Citigroup, Goldman Sachs, JPMorgan Chase and Bank of America– paid $1.6 billion in bonuses before Congress passed rules limiting executive compensation. Early this year, some banks were posting record profits, although bank profits have declined recently, apparently because of the still struggling economy. Speaking of which…
The Stimulus
In April 2009, Congress passed a $787 billion stimulus package. If TARP was the bail out for Wall Street, then the stimulus was the bail out for Main Street. The idea was that the government would cut taxes and create jobs to help people cope with the massive recession caused by the financial meltdown. Here’s how the money was spent:
Conservatives complain about all the new spending in the stimulus, but in reality 1/3 of the cost of the stimulus was tax cuts, including:
- A payroll tax credit of $400 per worker
- An expansion of the $1000 child tax credit
- Tax credits of $2500 for college tuition, $8000 for first-time homebuyers, and up to $1500 to make homes more energy efficient
- Changes to the Alternative Minimum Tax
- Tax credits to companies for renewable energy production
- $86.8 billion to help states pay for Medicaid
- $25.8 billion for health information technology investments and incentive payments
- $25.1 billion to provide a 65 percent subsidy of health care insurance premiums for the unemployed under the COBRA program
- $10 billion for health research and construction of National Institutes of Health facilities
- $2 billion for Community Health Centers
- $1.3 billion for construction of military hospitals (military)
- $1.1 billion to study the comparative effectiveness of healthcare treatments
- $1 billion for prevention and wellness
- $1 billion for the Veterans Health Administration
- $500 million for healthcare services on Indian reservations
- $300 million to train healthcare workers in the National Health Service Corps
Education: $100 billion
- $50 billion in aid to local school districts to prevent layoffs
- An increase in PELL Grants
- Money for Head Start
- $13 billion to help pay for Special education
- Other funding for eduction research and support
- $40 billion to provide extended unemployment benefits
- $19.9 billion for food stamps
- $14.2 billion to give one-time $250 payments to Social Security recipients and veterans receiving disability and pensions.
- $3.45 billion for job training
- Funding for subsidized community service jobs for older Americans
- Funding to help refill food banks, for meals programs for seniors, and for free school lunch programs
That was only part of the stimulus funding. Billions of dollars went towards transportation projects (like bridges, highways, and high speed rail), improving water and sewage treatment, repairing and improving government buildings, expanding broadband and wireless internet access, research on renewable energy, repairing and upgrading public housing, scientific research… the list goes on. (Wikipedia has a more complete list or check out Recovery.gov to see how the money is being spent.)
The Stimulus was intended to fill the gap in demand until the economy got moving again. For the most part it did what it was supposed to, but has been overwhelmed by budget crises at the state level. And so President Obama and most Congressional Democrats have called for extending some of the stimulus benefits until the economy is more stable, but conservatives in the Senate have managed to call it a bailout, say that it failed, and block all but a modest extension of unemployment benefits. For more, see our earlier post here.
What if the TARP money that was handed to the big banks had included a requirement that those banks use it to fund the business, commercial and construction loans that were already on the bank’s books? This would likely have led to fewer jobs lost, fewer businesses going under, and fewer mortgages foreclosed. Instead, banks like NCB, bought with TARP funds by PNC, managed their loans by using “at will” or “on demand” clauses to destroy good projects by simply calling the loans, putting hundreds of workers out of work, destroying businesses, and damaging smaller banks who had made loans to multiple tiers of businesses and individuals doing related work on the projects funded by those big loans.
Too late for many, the WH is just beginning to recognize that, in order for the job market to improve, small businesses need loans to run their operations. What if our leaders stopped the rhetoric and took the time to consider the whole picture, to consider the intended and unintended consequences of their acts.
Is Chase using Tarp or bailout money for all its new branch building construction?
The biggest and most important difference between TARP and the Stimulus is that the banks must PAY BACK Tarp, while the TAXPAYER is on the hook for the Stimulus. That is why the TARP was an “OK” idea (if not a good one), and the Stimulus was a bad idea. Which recipients of Stimulus funds are on the hook to pay them back?
Tax Credits are not the same as Tax Cuts. With a Tax Credit, the Government directs how you have to spend money, instead of you deciding what to do with your own money. If they would have lowered tax RATES, instead of doing tax CREDITS, then and only then could it have been said that 1/3 of the Stimulus was Tax Cuts.
A “Renewable Energy Tax Credit” says to the Taxpayer “You must spend your money on what I think is important in order to lower your tax bill”….that is not a tax cut.
@Zan Zibar
A few points:
1. Your distinction between tax cuts and tax credits is wrong. There are plenty of tax credits where the government does not direct how to spend the money. Take the stimulus for example: $116 billion of the tax cuts came from a payroll tax “credit” of $400 per worker. Workers were free to spend that money on whatever they liked.
2. If we use your definition of tax credit, in which the government directs how you spend the money, that only makes up about $40 billion of the $288 billion in tax cuts.
3. I’m not sure why you think the stimulus funds should be paid back… or how that would even work really. TARP was, in essence, an emergency loan program– it makes sense for banks to pay that back. The stimulus was a totally different type of program. Look at the list above– the stimulus funding went to pay for goods and services. It wasn’t a LOAN– it was a TEMPORARY (man, the ALL-CAPS EMPHASIS thing is contagious) increase in government spending, to keep people employed during the worst of the financial crisis.
@ Rob Cullen — Several points
1. Re: Tax Credits vs Tax Cuts — If we accept that 40 billion of the reduction in Taxes was based on spending of money in “government-directed” ways, then that leaves $248 billion in general credits. In general, I still think it is better to reduce rates than give credits, but even that should not be done unless in the presence of spending CUTS, not increases.
2. To say “Conservatives complain about all the new spending in the stimulus, but in reality 1/3 of the cost of the stimulus was tax cuts” does not counter the complaint of new spending. Even if 1/3 of the Stimulus was Tax Credits/Cuts/Reductions of some sort, this does not make the Spending portion (which was twice the size of the Tax Reductions) any less wasteful or “bad”.
3. The point of paying-back vs not-paying-back is to counter the over-generalized term of “bailout”, and to mention an important difference between the two programs that you did not single out. If some one or some organization is required to pay something back, it is indeed a loan, and not a bailout, and has little or no effect on me as a Taxpayer. LOANING money to banks who must pay the money back, is not the same as GIVING money to people to do make-work jobs just so that they would have a job. As a Taxpayer, I care a lot less (although I do care) what the government is spending the money on, if it is going to be paid back to me — in other words my Taxpayer dollars are not being “wasted”. If someone is spending $712,883 Taxpayer dollars to do a study on making a “joke machine” as part of the Stimulus (yes, a real Stimulus project), then my Taxpayer dollars ARE being wasted. It would be different if the Joke Machine people had taken a loan from the Government, and then had been required to pay it back. Conservatives would care a lot less about the outlay of funds if that were the case. So it is wrong for some people to say “We bailed out Wall Street, why shouldn’t we bail out ‘Main Street’ ? ”
…Whether Temporary or Permanent, it was money that was “flushed down the toilet”, for lack of a better phrase, that we will never get back…as opposed to TARP which we will get back. (When I say We, I mean Taxpayers).
@Zan Zibar
It sounds like you’re confusing the emergency stimulus with normal economic policy. During normal economic times, when the unemployment rate is low and the GDP is high, then yes, you would want new spending balanced by tax increases, and tax cuts balanced by spending cuts, so that the government isn’t spending more than it takes in (which btw, is the exact opposite of the policy of GW Bush and the last Republican-controlled Congress, who pushed through huge tax cuts, Medicare part D, and two wars– none of which was paid for).
The stimulus, though, wasn’t normal policy– it was a response to a major financial crisis, the worst since the Great Depression. The point of the stimulus was to get money into the economy quickly to make up for the massive decline in private spending, creating or saving jobs that were being lost at a record pace. With this goal in mind, it doesn’t really matter if you’re creating “make-work” jobs– because people with jobs, no matter what the job, buy food, clothes, housing, etc. which benefits the entire economy. But of course we want taxpayer money spent with an eye towards some kind of public benefit, and the truth is these weren’t make-work jobs– most of the money went to things like local school districts to prevent teacher layoffs, investments in health IT, infrastructure projects, etc.
Conservatives love to cite the supposedly “ridiculous” research projects that were funded with stimulus money, but if you look behind the soundbite, most of them actually make sense (more on that here http://www.miller-mccune.com/politics/your-pork-is-actually-my-policy-20567/ ). Take the joke machine– the Chicago Sun Times interviewed the researcher and found that the ultimate goal was to use the technology to create smarter, more intelligent search engines, possibly the next Google.
In any case, the money wasn’t “flushed down the toilet”– even most conservative economists don’t argue that. For example Doug Holtz-Eakin, former economic adviser to John McCain and president of the American Action Forum, has said, “the argument that the stimulus had zero impact and we shouldn’t have done it is intellectually dishonest or wrong. If you throw a trillion dollars at the economy it has an impact, and we needed to do something.”
I think the writer is missing the point that the Stimulus DID bailout the banks.
How exactly did the stimulus bail out the banks?