Federal Intervention: Is the Stimulus Program Invigorating Illinois' Economy?

Nov 1, 2010

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Credit State of Illinois
Although the federal stimulus package is increasingly unpopular among the American public, there’s little doubt that Illinois’ top Democrats support it. In mid-September, U.S. Sen. Dick Durbin and Gov. Pat Quinn came to Alton to tout the fact that Illinois became the first state in the nation to start work on high-speed rail improvements paid for by the stimulus bill.

The pair said upgrading the 90-mile stretch of railroad from Alton to Springfield would initially create 900 jobs, directly and indirectly. All told, improving the route from Chicago to St. Louis so trains could cover the distance in four hours would add 24,000 Illinois jobs, they claimed. “This project,” Quinn said, “is essential to strengthening Illinois’ economic recovery, creating jobs and developing long-term investment in Illinois.”

The stimulus package is indeed having a major impact on Illinois. The money has funded construction projects such as the high-speed rail upgrades, softened the recession’s impact on the state budget and spurred changes in policy regarding everything from charter schools to Medicaid reimbursements. But the fundamental question of whether the stimulus is working here — in other words, whether it’s made the economy better than it would have been otherwise — is one that may not be answered by economists before the public reaches its verdict. Politically, at least, Americans are not sold on the stimulus.

Three-fifths of respondents believed the stimulus had not helped the country’s job situation, compared with only a third of respondents who said it did, according to a national June poll by the Pew Research Center. That means support for the federal intervention is slipping. In February 2009, when the stimulus was signed into law, half of respondents supported the idea.

Soaring public debts at both the state and federal level have not revived the moribund economy, and joblessness remains high. By August, Illinois’ unemployment rate was still at 10.1 percent — far higher than the 8.7 percent where it stood in February 2009 — and still higher than the national average of 9.6 percent. 

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Credit ProPublica.org, U.S. Census Bureau

The best argument that Democrats have to defend the stimulus package is that it prevented the economy from getting even worse. Many nonpartisan economists have reached that conclusion, with congressional researchers saying the package saved some 3 million jobs throughout the country. But that’s cold comfort to laid-off workers still looking for a job. President Barack Obama himself has expressed frustration with how long the recovery has taken. Republicans, meanwhile, have used it as a campaign issue to attack Democrats.

“President Obama said his trillion-dollar stimulus package ‘worked.’ The American people know otherwise,” said Peter Roskam, a Republican congressman from Wheaton, just a week before the Alton announcement. “Eighteen months and $500 billion in stimulus spending later, President Obama still doesn’t get it. He said that with the first stimulus package, unemployment would peak at 8 percent. Now we’re at 9.6 percent unemployment nationally, and the situation is much worse in many states.”

What is certain is that the political climate changed dramatically since the stimulus bill passed. Few Republicans supported the original proposal, but by this year, the Democrat-controlled Congress took months to pass a $26 billion follow-up bill — which included a six-month extension of a boost in aid to states. Then they were able to do so only by taking money from other safety net programs. A September proposal by Obama to dedicate $50 billion more toward improving the nation’s roads, runways and rails also fell flat. 

In Alton, Durbin addressed the mounting skepticism. “Come to Alton and see what’s happening nine months after Illinois got the grant,” he said of stimulus critics, according to The (Alton) Telegraph. 

“There are now 900 more good-paying jobs in Illinois. My question for skeptics is, ‘What would you do?’” Durbin asked. “It’s not just 900 jobs on this segment; 6,000 more people will go to work on the high-speed rail. … They are going to be buying materials from Decatur, as well as ballast from Missouri. Generations to come will have better rail service.”

One of the most frustrating things about evaluating the stimulus plan is that economists don’t have any great way to measure its effectiveness. It’s not like a lab experiment, where economists can compare two identical scenarios with only one variable — in this case the stimulus — being different. To determine how effective the stimulus was, economists explain, you would have to try to figure out what would have happened without that stimulus.

Several other factors, of course, are at play, too. The stimulus, after all, was one of many major federal actions to try to stop the economic fall early in the recession. First, Congress and President George W. Bush passed the $700 billion “bailout” of banks and financial institutions, called the Troubled Asset Relief Program, or TARP. Second, the Federal Reserve acted aggressively to keep credit markets working and to try to stave off deflation. The Fed, for example, bought $1.25 trillion in mortgage-backed securities. Finally, Obama signed the stimulus bill, now estimated to cost more $814 billion, little more than a month after taking office. 

A few national studies, widely touted by Democrats, concluded that the stimulus did, indeed, make the situation better. Mark Zandi, the chief economist of Moody’s Analytics, and Alan Blinder, a Princeton University economist, tried to model the entire U.S. economy with or without the stimulus in a report released this summer. They concluded that the effects of the federal stimulus were “very substantial.” They estimated that the package raised the country’s gross domestic product by 3.4 percent, kept the unemployment rate 1.5 percentage points lower than it would have been otherwise and added 2.7 million American jobs. At the same time, though, they said other federal policies, including the “bailout” of banks and response by the Federal Reserve, had an even greater benefit. 

The Congressional Budget Office reached similar conclusions about the stimulus bill. The agency estimates that the stimulus package will account for somewhere between 1.9 million and 4.7 million full-time jobs in 2010, compared with 700,000 to 1.3 million jobs last year. According to the CBO, the number of stimulus-supported jobs will taper off some during 2011 then drop substantially by 2012.

Unfortunately, state-by-state estimates of the stimulus’ effects are difficult to come by. Numbers vary from various sources. By the state’s count, the stimulus package had sent more than $11.5 billion to Illinois by the end of July. (A nonprofit news gathering group, ProPublica, calculated the overall amount at more than $14.2 billion in early June.) Recipients of stimulus funds reported that in the second quarter of 2010, the stimulus package had funded 21,635 jobs in the state, although that number does not include the effects of two of the largest portions of the stimulus — tax cuts and aid to states. The CBO says that during the second quarter of 2010, reports from recipients only reflect one-fifth of the total amount of government spending or tax breaks from the stimulus package.

The stimulus package, formally titled the American Recovery and Reinvestment Act, or ARRA, is a wide-ranging collection of government spending and tax breaks. Its biggest components include tax breaks for individuals and families; aid to states and localities, particularly money for Medicaid and schools; and construction funds, mostly dedicated to repairing bridges and roads.

Some of those components are similar to other stimulus packages that Congress passed during the last decade. Congress tried to get the economy moving in 2001, for example, by mailing Americans $300 checks and by sending money to states. When the Great Recession first struck, the federal government responded again by trying to put money in the hands of consumers, this time with $600 checks for individuals and $1,200 for families. 

“If you’re in office, stimulus always seems like a good idea” says Fred Giertz, an economics professor at the University of Illinois’ Institute of Government and Public Affairs. Congress probably would have passed a stimulus package in 2009 even if John McCain had become president instead of Obama, he says. “If you’re a politician, you want to be considered as active, not necessarily for economic reasons but for political reasons.” 

But in terms of sheer size and scope, the 2009 legislation dwarfs its predecessors. The stimulus law passed only a year before Obama’s, for example, cost $168 billion, a third of what the 2009 law cost. 

The architects of Obama’s stimulus also included dozens of policy provisions that can have far-reaching effects. Because of the stimulus, dozens of states, including Illinois, have changed their policies on charter schools and evaluating teachers, thanks to the Race to the Top competition. Billions of dollars are going toward expanding the use and availability of broadband technology. Midwestern states are working on building a network of faster passenger trains, using Chicago as its hub. There’s money to restore shoreline along the Great Lakes. The list goes on. Also included are provisions for electronic health records, “smart” electrical grids, unemployment insurance and home weatherization. 

In Illinois, the Obama administration pointed out in a recent report, tax credits in the stimulus package cleared the way for a Streator wind project, with 150 turbines and generating enough electricity to power 86,000 homes. Another $25 million is going to repair the Eads Bridge in St. Louis, which spans the Mississippi River between Missouri and Illinois. Other projects include the renovation of public housing for senior citizens in Chicago; the clean-up of a site contaminated with hazardous waste on Waukegan’s lakefront; and the roll-out of smart electric meters in Naperville. 

“Many of these projects,” Vice President Joe Biden wrote, “lay the foundation for sustainable economic growth and job creation: traditional infrastructure projects like highway, railroad and waterway construction and 21st century infrastructure projects like the installation of broadband lines and towers.”

One place where the stimulus has had an undeniable effect is on state government. Nearly two-thirds of the money in the stimulus, after all, passed through or went to state governments nationwide.

The federal government, for example, increased its share of Medicaid expenses. Normally, Illinois and the federal government split the cost of the health insurance program for the poor about 50-50. Under the stimulus program, though, the federal government is picking up nearly 62 cents of every dollar. It’s not small change. By the end of this year, that’s expected to translate into an additional $2.8 billion in the state treasury.

Illinois received an additional $3 billion for school aid, money that is often described as preventing teacher layoffs. A total of $936 million went toward building or repairing highways and bridges.

But along with the cash, states had to accept the conditions that Congress attached to the money. One Medicaid rule addressed Illinois’ notorious backlog for paying its Medicaid providers; the stimulus required that to get the enhanced federal match, states must pay doctors and hospitals quickly. What that means, though, is that the state pays those protected Medicaid providers first, while other state vendors — such as pharmacies and social service agencies — must wait longer.

The stimulus also prevented states from scaling back eligibility for Medicaid. Of course, during a recession, the number of people who qualify for Medicaid increases when they lose jobs or no longer earn as much as they did. But recessions are also the time when states can least afford to provide more coverage, so they often make it more difficult for residents to qualify for Medicaid during economic downturns. The stimulus, though, prevented states from doing that, even going so far as forcing them to rescind some cutbacks they had made before the stimulus passed. Even though the boost in Medicaid payments runs out next June, the new federal health reform law prevents states from significantly scaling back Medicaid eligibility for years to come.

The federal stimulus money on infrastructure is being spent at the same time as Illinois’ launch of its first public works program in a decade. But Chris Cornell, an economist with Moody’s Analytics, says the construction industry in Illinois has been hit harder than just about any other state. Even with the stimulus money and the capital construction program, he says, “there is no shortage of unemployed construction workers.”

Looking into the future, Cornell says high-speed rail is the most relevant stimulus program for the future of Illinois’ economy. Improvements on passenger rail could also boost the performance of freight rail, which share the same tracks. He says the fact that the planned Midwestern network is based in Chicago could boost the city’s role as a major transportation hub, helping it remain competitive with other logistical centers such as Atlanta.

Although downstate has fared better, the Chicago area is still stuck in the recession that struck in 2007, Cornell says, and the state as a whole won’t recover until the Chicago area improves. The housing market there is especially worrisome. Although housing prices have slowed their decline, they may be pushed lower as lenders that ended up owning homes through foreclosure start selling their “shadow inventory.” There’s a worry among economists that the scenario could force a double-dip recession, he says.

And the stimulus package could be for naught in Illinois if state government doesn’t get its fiscal house in order, Cornell warns. The uncertainty caused by the state’s mushrooming budget deficit puts a damper on economic recovery efforts because businesses can’t plan for the future. The state budget crunch could lead to tax hikes, deteriorating schools or neglected roads, all of which affect the business climate. “Illinois is in terrible shape, compared to other states,” Cornell says, “and the state’s budget problems are foremost among the reasons for that.”

Daniel C. Vock is a Washington, D.C.-based reporter for Stateline.org.


Stimulus funds to Illinois
Total awarded $8,444,100,000
Total received $4,455,370,000
Reported jobs created 21,642

As of June 30. Source: Recovery.gov

Illinois Issues, November 2010