Stimulus spending finally starts to trickle down--By David J. Lynch, USA TODAY

In Indianapolis last month, a state government official named Jacob Sipe finally got the news he'd been anticipating. The U.S. Treasury had approved $164 million to finance affordable housing projects left paralyzed by the credit crisis, using funds from the Obama administration's increasingly controversial fiscal stimulus.

Before the financial crisis erupted, the housing program was funded via state tax credits that developers in turn sold to large banks. With the banks crippled, demand for the tax credits — and thus the funds that subsidized the state's low-cost housing — evaporated.

"We have a lot of existing multifamily developments built in the '60s and '70s that need to be rehabbed. … They just need investment," said Sipe, Indiana's multifamily housing manager.

Now, they've got it. The stimulus effectively substitutes Uncle Sam for the banks. The state sells its tax credits to the Treasury Department and funnels the proceeds to developers, making it possible for them to offer below-market rentals for the working poor in a state that's among the hardest hit by the economy's plunge. In central Marion County, a family of four making less than $41,000 annually is eligible.

Indiana's housing initiative — and similar efforts in 23 other states and territories — illustrates the impact of the administration's recovery strategy. The state expects 3,500 construction jobs to result from its part of the stimulus spending. That reality is a long way from the political brawl in Washington, where less than five months since President Obama signed into law the American Recovery and Reinvestment Act, the $787 billion fiscal stimulus is alternately condemned, mocked and defended.

"We are moving in the right direction. We are cleaning up the wreckage of this storm," President Obama insisted Saturday.

From Indiana rental units to a Colorado energy company and workers' paychecks everywhere, the stimulus is just beginning to make itself felt. In its short history, the program has emerged as ground zero of a running debate on the future of the badly damaged U.S. economy. The role of government, the societal cost of prolonged joblessness, the danger to future generations of an ever-larger public debt — they all come together in the hard-fought clash over the efficacy and wisdom of the stimulus.

The first Obama administration stimulus is actually the second federal government effort to boost demand in a post-bubble economy grown desperately short of it. In 2008, the Bush administration spent $152 billion on tax rebates. Shortly after taking office, amid clear signs of an economy in free fall, the new administration unveiled a massive fiscal program designed to revive a lifeless economy with tax cuts, road and bridge construction and alternative energy projects. The official forecast said the $787 billion measure would keep unemployment from topping 8%.

If only.

Now, amid the worst financial crisis in 80 years, the unemployment rate has reached 9.5% and is barreling toward double digits. Republicans such as House Minority Whip Eric Cantor say the verdict on Obamanomics is in. "We're hearing a lot of excuses — that we have to wait, or it wasn't big enough and we have to do it again. … Clearly, the stimulus bill has failed," Cantor says.

Mixing $499 billion in spending with $288 billion in tax cuts, the stimulus bill emerged from Congress with components designed as much to attract Democratic and Republican support as for their economic punch. Some elements bore a more playful pedigree. The TIGGER (Transit Investments for Greenhouse Gas and Energy Reduction) program is housed at the Transportation Department, but appeared inspired by Winnie-the-Pooh.

Ironically, the Republicans who earlier this year were complaining that Obama was too gloomy about the economy, now gripe that his unemployment forecasts were too sunny. But it's not only partisan critics who are taking shots. Investor Warren Buffett, a sometimes ally of the president, likens the stimulus to a "half-tablet of Viagra." And left-of-center economists, who from the outset wanted a larger amount of pump-priming, now fear that the political support for doing more will have evaporated by the time it becomes apparent that more is needed.

Stimulus 'just about on track'
Not so fast, say the plan's authors. Larry Summers, director of the National Economic Council, says the stimulus already has contributed to the economy's recent stabilization. And Summers insists unemployment might already have hit 10% if the president hadn't acted. "I think the stimulus is just about on track, progressing about as we expected," he tells USA TODAY.

As of July 3, the administration says, about $217 billion of the stimulus is being felt throughout the economy. That breaks down into: $43 billion in payroll tax relief plus $174.9 billion the government has committed to contracts.

In Boulder, Colo., Blake Jones, president of Namaste Solar, says the stimulus saved about 15 jobs at his small manufacturer. A $3 billion Treasury Department program converted an existing tax credit for solar investments to a direct payment, prompting commercial customers who no longer could benefit from a tax credit to go ahead with projects.

"The outlook was very bleak. … Now we're anticipating not losing business, but we may continue growing," Jones said.

While critics complain that the stimulus has been slow out of the gate, Summers says the administration always planned for the stimulus to work over a two-year period. So far, the modest economic boost from the government coffers has been overwhelmed by other developments. Oil prices have risen from roughly $35 a barrel in February to just under $60 today, draining more than $165 billion from the economy on an annual basis. Partly in response, the July reading of consumers' expectations for the future took its biggest dive since October.

The economy also has deteriorated more sharply than anticipated since January, meaning that the recession's expected 5 million job losses already have hit 6.5 million and are headed higher. The budget problems of state and local governments led to thousands of layoffs, while auto plant shutdowns added to the economy's woes. In June, despite weeks of talk about "green shoots" on the economic horizon, the economy shed an additional 467,000 jobs.

"You definitely need to be patient. There's no way you can expect results as fast as some people expect. It's not like a fast-food breakfast," says John Silvia, chief economist for Wachovia Bank.

Job-creation goal far off
It's obvious that the administration's initial economic forecast, produced in January, was wrong. That called for unemployment peaking at 8% with the stimulus and 9% without it. The vow to "save or create 3.5 million jobs by the end of 2010" looks both more difficult to achieve and inadequate to the task.

Administration officials defend their forecasts as in line with the consensus estimates of Wall Street and other professional economists. It's an odd defense to offer amid the wreckage of an era defined by consensus thinking — on housing prices, credit and stocks — that turned out to be so poorly grounded. "They were going with the consensus, but this is a case where the consensus has been consistently wrong," says economist Dean Baker of the left-leaning Center for Economic and Policy Research.

Administration officials hedged their forecasts, alluding to greater-than-normal uncertainty in the wake of an especially fierce global financial crisis. But Summers says even if they had known in January that joblessness would rise as quickly as it has, "We would have made broadly the same choice" about the size of the stimulus.

They may get another chance. Even if the economy begins growing before year's end, as many economists expect, the gains are likely to be weak and unimpressive. The employment picture is generally the last part of a sick economy to heal. So throughout 2010, and likely beyond, the jobless rate is likely to be high and a magnet for political dissatisfaction.

Barry Ritholtz, CEO of investment firm Fusion IQ, says the unemployment rate may not begin declining for 24 months after the economy resumes growing. "If it turns out my forecast of a crappy housing and jobs market is right, then we'll need a second, third and fourth stimulus," says Ritholtz, also the author of the well-read blog The Big Picture.

Republican calls for the administration to abandon hopes of goosing the economy in favor of tax cuts aimed at promoting job growth are met by demands from the left for a second Obama stimulus. The White House officially says it's too soon to talk about more anti-recession spending. But economist Laura Tyson, a member of the president's Economic Recovery Advisory Board, said in Singapore last week the administration may have to consider a second stimulus because the economy remains so feeble.

If it does, the debate later this year is likely to revolve about a perceived trade-off between prolonged unemployment and higher public debt. Baker of the Center for Economic and Policy Research says that with interest rates still near generational lows, the U.S. can afford to increase borrowing to promote more jobs and societal wealth. "You do have a free lunch," he says.

Ian Shepherdson of High Frequency Economics, who favors a second dose of fiscal medicine, says the alleged savings of eschewing a second stimulus are illusory. If the economy remains weak for a longer period, public finances would be hurt by a prolonged episode of depressed tax revenues, he said.

"In order to boost the chance of starting a self-sustaining recovery, which will then generate rising tax revenues, it is necessary to take some fiscal pain upfront," he wrote clients Monday.

Republicans won't see it that way. The big question, of course, is whether voters will.