The Case For Urgent Action on Economic Recovery (Center for American Progress)

The Case For Urgent Action on Economic Recovery:
Today, President-elect Obama delivered a speech at George Mason University in order to "make the case for urgent action on an American Recovery and Reinvestment Plan," an economic stimulus package that could amount to $775 billion in government spending and tax cuts. "I don't believe it's too late to change course, but it will be if we don't take dramatic action as soon as possible," said Obama. "If nothing is done, this recession could linger for years. The unemployment rate could reach double digits. Our economy could fall $1 trillion short of its full capacity, which translates into more than $12,000 in lost income for a family of four." An economic recovery package is undoubtedly necessary, as reports indicate that the U.S. private sector shed almost 700,000 jobs last month alone. Former secretary of labor Robert Reich predicted that without a stimulus package, 3 million jobs will be lost in 2009, and "unemployment will rise to 10 percent." The rescue package must be large enough to ensure that America avoids the "nightmare scenario" of Nobel Prize-winning economist Paul Krugman: the "economy plunges for most of 2009, and when the plan finally starts to kick in, it's only enough to slow the descent, not stop it." However, as the Center For American Progress' Will Straw also explained, "It must help those most affected [by the economic crisis] and build our future economic strength while achieving fiscal responsibility. There can be no place for special interests or ideological proposals."

THE MOST 'BANG' COMES FROM SPENDING: While quickly passing the stimulus bill is an absolute must, stimulus dollars need to be targeted toward those areas in which they will promote the most economic activity, and not be wasted on corporate handouts. As Yves Smith explained at Naked Capitalism, "stimulus programs of various sorts are meant to compensate for a falloff in demand." Thus, the best forms of stimulus are those that start moving through the economy right away. According to an analysis by Moody's Economy.com, the most fiscal stimulus "bang for the buck" comes from various forms of government spending, including infrastructure investment, aiding state and local governments, and securing the social safety net through increased Food Stamps and extending unemployment benefits. For every dollar the government invests in infrastructure, real GDP changes by $1.59, while a dollar invested in state aid changes GDP by $1.36. And as Krugman noted, "public investment leaves something of value behind when the stimulus is over." Stimulus of this sort can help kickstart the economy, while putting the country on a track toward long term recovery and growth.

THE RIGHT KIND OF TAX CUT: There are, however, limits to how much can be spent on infrastructure, state aid, and other initiatives, and therefore, some tax cuts should be part of the rescue package. But the danger with using tax cuts as stimulus is that the money may be saved instead of spent, thus diminishing the return. So, as the Center for American Progress Action Fund's Matthew Yglesias noted, if tax cuts are included, the idea "is to put money in the hands of individuals with a high propensity to spend the money -- thus giving businesses more customers and creating labor market demand so that unemployed people can find jobs." Obama is reportedly looking at making 40 percent of his package tax cuts, some of which are in this vein. His "Making Work Pay" proposal, which would give working individuals a $500 credit and families a $1000 credit -- in the process helping about 150 million Americans making less than $200,000 -- is one. Another is lowering the income threshold for the Child Tax Credit, which "would grant an estimated 5.5 million poor children access to the credit for the first time, and expand the tax benefit for millions more poor children who currently qualify for only a partial credit." These are the people most likely to immediately spend the money, and as Straw explained, "[I]f this money is spent, rather than being saved or used to bring down debts, then it will certainly have a stimulative effect."

THE WRONG KIND OF TAX CUT: There are, however, tax cuts that would be significantly less effective as stimulus, and Obama is reportedly considering such cuts in an effort to entice conservatives into supporting the rescue plan. One reported proposal "would provide businesses with billions of dollars in refunds" by enabling companies who posted a loss last year "to get refunds for taxes paid as far back as five years earlier." Krugman called this tax cut "a lump-sum transfer with no incentive effects," while Dean Baker, Co-Director of the Center for Economic and Policy Research, told The New Republic that the cut "is simply a give-away to the financial industry and homebuilders. ... This tax cut has nothing to do with stimulus." Baker also pointed out that "really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007" and stand to reap huge benefits from the cut. Another reported proposal, extending bonus depreciation, would allow business "to write-off the cost of equipment faster." As Howard Gleckman wrote for the Tax Policy Center, "Bonus depreciation in its many incarnations has been tried a half-dozen times over the past four decades and its benefits are, shall we say, hard to find." Conservative organizations like the Club for Growth and the Chamber of Commerce have both put forth stimulus plans with tax cuts that are far worse -- such as cutting corporate income taxes or cutting the corporate capital gains tax -- but the business tax breaks being proposed still amount to "lots of buck, [with] not much bang," noted the Tax Policy Center.