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Scot Lehigh

A large stimulus bill for large problems

By Scot Lehigh
February 6, 2009
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PRESIDENT Obama's call for a large stimulus plan is under assault by arguments as unpersuasive as they are uninformed.

Is the stimulus plan large? Yes, and with good reason. Our economic problems are as well.

With consumers poorer from $6 trillion in vanished housing wealth and $7 trillion in vaporized stock value, we're set to suffer annual losses in overall economic activity of a trillion dollars this year and a trillion or more next year.

It's not just consumer spending that has collapsed. Other traditional generators of economic growth - business investment, housing construction, and exports - are all anemic. You can trace the effects of the sharp economic contraction in frequent stories about massive layoffs.

That leaves government spending as the nation's best hope for softening a major downturn. To address a projected loss of more than $2 trillion in economic activity, Congress is debating an overall stimulus package of $819 billion to $900 billion. Although those figures sound large, on a dollar-for-dollar basis they would plug less than half the growing hole in the economy. So the stimulus size is hardly excessive - and conservatives' calls for cutting it back make little sense.

Put another way, over the last 12 months, we've lost 2.6 million jobs. We would have needed to add 1.5 million just to accommodate the growing workforce, notes Lawrence Mishel, president of the Economic Policy Institute, a liberal Washington research group. Thus we're at least 4 million jobs away from economic health - and we are likely to lose millions more. Against that need, the stimulus plans are estimated to create or maintain a total of 3 to 4 million jobs.

Nor is it true, as some critics would have you believe, that the plan is a farrago of fiscal fat that will be all sizzle and no steak. Yes, there are some questionable items, but they are only a small fraction of the proposals.

"The vast majority of what is in these two bills is pretty good stimulus," says Jim Horney, director of federal fiscal policy for the Center on Budget and Policy Priorities, a progressive Washington think tank.

Although one can debate the necessity or importance of various projects, almost any new spending will have a stimulative effect - including resodding the National Mall.

Another specious argument is that the stimulus won't be effective because much of it won't take place until after the recession is over. That disingenuous claim is based on a preliminary Congressional Budget Office analysis of one part of the House bill.

In a Wednesday conference call, I had a chance to ask Lawrence Summers, director of the National Economic Council, how quickly the stimulus would take effect. His answer: "About 75 percent of the money will be spent out in the first 18 months."

That squares with the analysis Horney, a former congressional numbers-cruncher, did of the Senate bill. What's more, Horney calculates that the impact of 94 percent of the Senate bill and 85 percent of the House bill would be felt by Oct 1, 2011. Given that experts think the economy will still be running well short of capacity in 2011, that hardly constitutes an ill-timed stimulus.

Now, it's heartening to hear congressional conservatives voicing concern about fiscal discipline again after the borrow-and-spend profligacy of the Bush years. Still, they'd be easier to take seriously if their own favored remedies - tax cuts - weren't considered one of the least effective approaches to economic problems of this magnitude.

"Personal tax cuts are much less effective than spending, and business tax cuts are much less effective than personal tax cuts," notes Mishel.

Those who want a bigger bang for our stimulus bucks would like fewer dollars devoted to tax cuts. Yet that's obviously not going to happen. In another conference call, Princeton University economist Alan Blinder, former vice chairman of the Fed's board of governors, aptly summed up the situation.

"No one is going to get exactly what they want, but getting nothing is a far, far worse outcome," he said. "It would be an act of extreme national stupidity not to enact a big stimulus bill at this point."

Amen.

Scot Lehigh can be reached at lehigh@globe.com.

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