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President Obama’s Big Stimulus

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Dean Baker
The Guardian Unlimited, January 19, 2009

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There is much to celebrate this week. Topping the list of course is President Obama’s inauguration. There is good reason to believe that we have seen power pass from one of the country’s worst presidents to one of its best.

We should also be celebrating the fact that we now have a president who knows that the economy is in serious trouble and is prepared to take the steps necessary to set it right. The $825 billion (@ 2.8 percent of GDP) two-year stimulus package that he put together with Congress is a good start. 

The main features of the bill are very much on the right track. The biggest problem is that it should be larger. This downturn is so severe that this package may not be sufficient to offset even half of its impact.

The Congressional Budget Office (CBO) projects that the unemployment rate will average 9.0 percent in 2010 in the absence of a stimulus package, five full percentage points above its estimate of full employment (six percentage points above mine). A rule of thumb is that it takes a two percentage point increase in GDP to reduce the unemployment rate by one percentage point.

This means that to get back to CBO’s projection of full employment we would need to increase GDP in 2010 by 8 percent above its baseline, or $1.2 trillion. To reach my estimate (I have a better track record than CBO), it would be necessary to increase GDP in 2010 by 10 percent or $1.5 trillion.

If we assume a multiplier effect of 1.4 for the stimulus package being debated in Congress, then the $400 billion in annual spending will raise 2010 GDP by $560 billion, less than half what would be needed to bring us back to full employment by CBO’s estimate and just more than one-third by my estimate.

Apart from the size, most of the money in the package looks to be well spent. Two-thirds of the stimulus goes to spending of various types. Much of this will take the form of aid to hard-pressed state and local governments in the form of increased funding for Medicaid and education. The package will also increase the generosity of unemployment benefits as well as modernizing the program so that more part-time and intermittent workers will be eligible for benefits.

The package contains considerable funding for green initiatives, including money for retrofitting government buildings and homes, public transportation, promoting alternative energy, and modernizing the nation’s electric grid.

It also includes substantial funding for shovel-ready infrastructure projects. Much of this spending will go to badly needed repairs to roads and bridges. Fixing potholes and ensuring the safety of bridges should be a high priority.

Unfortunately, some of this spending may take the form of sprawl-promoting highways. Representative James Oberstar, the chairman of the House transportation committee had proposed screens that would have blocked environmentally harmful projects. However, these screens were removed in the negotiating process. The rules of the House make it unlikely Oberstar’s screens can be placed back in, but voters should keep this in mind.

Another downside to the bill is that it contains substantial tax cuts for business, including some that will do nothing to stimulate the economy. At the top of this list is a provision that allows companies to write-off losses against five years of back taxes. For the most part, this is a giveaway to banks and builders, since few other firms have losses large enough to benefit from this provision.

Fortunately, an amendment was slipped in that would prohibit recipients of TARP funds from taking advantage of this tax break. Keeping this “one trip to the trough” rule in the bill may prove difficult since many senators are staunchly opposed to any limits on welfare for banks. People should watch this one closely.

This bill is far from perfect, but it is a very important and substantial step towards addressing the extraordinary economic crisis facing the country. We will need much more spending through the rest of this year and 2010, and almost certainly beyond, to restore high levels of employment.

This need will provide opportunities: universal health care, publicly-funded clinical trials for prescription drugs; public support for open software; public support for creative workers (e.g. writers and artists, following the model of the Works Progress Administration); and tax subsidies for shorter workweeks, more vacation time, and family friendly work places.

The policy failures of the last three decades have given us an enormous to-do list.  We finally have the opportunity to make progress, but it will be a long and difficult battle. The people who wrecked the economy are still there, and many still hold their hands on the levers of power. (The notion that people should be judged on their track record is still a radical proposition in Washington policy circles.)

But for now we should celebrate. We have a new president who recognizes the difficulties the economy and the country face and is prepared to take steps to set things right. We should help him.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.