NY Times, January 10, 2009
No Instruction Manual as Stimulus Bill Takes Shape
By EDMUND L. ANDREWS and DAVID M. HERSZENHORN
WASHINGTON — The fresh evidence on Friday of the economy’s downward
spiral focused even more attention on two questions: Is the stimulus
package being pushed by President-elect Barack Obama big enough? And
will the component parts being assembled by Congress provide the most
bang for the buck?
With the Federal Reserve having just about reached the limit of how much
it can help the economy with cuts in the interest rate, Washington’s
ability to end or at least limit the recession depends in large part on
the effectiveness of the big package of additional spending and tax cuts
that Mr. Obama has made the centerpiece of his agenda.
And with the economy facing what now seems sure to be the sharpest
downturn since the 1930s, the financial system balky and the government
facing towering budget deficits, economists and policy makers
acknowledge that there is no playbook.
“We have very few good examples to guide us,” said William G. Gale, a
senior fellow at the Brookings Institution, the liberal-leaning research
organization. “I don’t know of any convincing evidence that what has
been proposed is going to be enough.”
In part because Mr. Obama wants and needs bipartisan support, the
package is being shaped by political as well as economic imperatives,
complicating the process by putting competing ideological approaches
into the mix.
It includes $300 billion in temporary tax cuts for individuals and
businesses, in part to attract Republican support. It includes a big
expansion of safety-net programs like unemployment insurance, which
Democrats say makes both economic and social sense. It includes more
money for highways, schools and other public infrastructure; more money
for “green” energy projects; and more money to help state governments
pay for health care and education.
Republicans, as always, are advocating for more and broader tax cuts.
But the evidence is ambiguous about whether tax cuts will really spur
economic activity at a time when consumers and businesses alike are
frozen in fear and reluctant to let go of their money.
The risk is that Mr. Obama and the Congress will weigh down their effort
with measures that cost many billions of dollars but may not have much
impact on economic activity.
Tax breaks, for example, usually produce less than $1 of stimulus for
every dollar they cost, economists say. Spending on public construction
projects, like highways and bridges, produces the most economic activity
— but there is a limit to how many projects are “shovel-ready,” and even
those take time to generate jobs and ripple through the economy.
Christina Romer, whom Mr. Obama has designated to be his chief
economist, concluded in research she helped write in 1994 that
interest-rate policy is the most powerful force in economic recoveries
and that fiscal stimulus generally acts too slowly to be of much help in
pulling the economy out of recessions, though associates said she now
supports a big stimulus package if policy makers roll it out early
enough in the recession.
The goal behind all those ideas is to jump-start economic activity by
getting as much money as possible as quickly as possible into the hands
of consumers and businesses, trying to make up for the falling demand in
the private sector that is leading to higher unemployment. And although
the package includes a big dose of tax cuts, it represents a big
departure from President Bush’s playbook by relying heavily on direct
government spending.
“This is not an intellectual exercise, and there’s no pride of
authorship,” Mr. Obama told a news conference in Washington on Friday.
“If members of Congress have good ideas, if they can identify a project
for me that will create jobs in an efficient way — that does not hamper
our ability to, over the long term, get control of our deficit; that is
good for the economy — then I’m going to accept it.”
Mr. Obama’s aides said he did not intend to unveil a detailed formal
proposal but rather to allow Congress to fill in the outline that he has
proposed.
Given the recent scale of the downturn — the nation lost 1.5 million
jobs in the last three months of 2008, and economic output during those
months shrank by 6 percent compared with same period in 2007 —
economists were highly uncertain about whether the economic plan would
provide enough firepower.
Adam Posen, the deputy director of the Peterson Institute for
International Economics in Washington, said Mr. Obama’s plan could
provide just the right boost — if it was carried out properly.
But as the Federal Reserve has been learning for months now, the biggest
obstacle to economic activity right now is not a shortage of money. The
real obstacle is pervasive fear, which has made banks reluctant to lend
and companies reluctant to invest in expansion.
Alan J. Auerbach, an economist at the University of California,
Berkeley, said the overall scale of the program looked “reasonable” at
$800 billion over two years.
“It’s much bigger than anything that’s been tried in my lifetime, but
this is scarier than anything we’ve seen in my lifetime,” Professor
Auerbach said.
Left to their own devices, many Congressional Democrats would prefer to
focus almost entirely on spending projects and avoid tax incentives.
“One thing we learned from the Depression is marginal, incentive changes
don’t work very well when the economy is falling away from you very
rapidly,” said Senator Kent Conrad, Democrat of North Dakota and
chairman of the Senate Budget Committee. “And that’s what’s occurring here.”
But Republicans have been adamant about the need for tax breaks, and Mr.
Obama has made it clear he would like to bring as many members on board
as possible.
Representative Paul D. Ryan, Republican of Wisconsin, said in an
interview, “I really do believe that if you combine the evidence of
history along with the psychological concerns about making investments
in the economy today, the better bang for your buck is lower taxes that
are certain and permanent and lasting.”
The Democratic plan would direct much of the stimulus money to
low-income and middle-income families. That reflects both traditional
Democratic concerns about helping lower-income households, as well as
the view of economists who say that people with lower incomes are more
likely to spend rather than save any money they receive from the government.
Mark M. Zandi, chief economist at Moody’s Economy.com, a forecasting
firm, told a forum of House Democrats this week that the “bang for the
buck” — the additional economic activity generated by each dollar of
fiscal stimulus — was highest for increases in food and unemployment
benefits. Each dollar of additional money for food stamps yields $1.73
in additional economic activity, Mr. Zandi estimated, and each extra
dollar in unemployment benefits yields about $1.63.
By contrast, Mr. Zandi estimated, most tax cuts produce less than a
dollar for each dollar of stimulus, especially if the tax cuts are
temporary, because people save at least some of their extra money.
One of the few tax cuts that economists say can generate a positive bang
for the buck is a reduction in payroll taxes for Social Security and
Medicare.
Mr. Obama wants to offer a tax credit of $500 for individuals, and up to
$1,000 for families, which they would receive through a temporary
reduction in payroll tax withholdings. The idea, known as the Making
Work Pay credit, was part of Mr. Obama’s economic platform during the
presidential campaign. As originally envisioned, it would have been
available to households with annual incomes as high as $200,000.
But economists said the tax credit could have drawbacks as an economic
stimulus measure, mainly because people usually save part of the money
or use it to pay down debt. That makes good sense from an individual’s
standpoint but does nothing to increase economic activity.
Joel Slemrod, a professor of tax policy at the University of Michigan,
said, “The research I’ve done on the 2001 and 2008 tax rebates suggests
that the proportion of the rebates that went to spending was rather
small, about one-third.”
After Congress approved Mr. Bush’s tax rebate to individuals and
families last spring, economic activity jumped fleetingly during the
summer, and then stalled out again in the fall.
Some Democratic officials were also skeptical.
“It’s not that rebates don’t work under normal conditions,” said one
senior Democratic aide in the Senate. “It’s that current conditions are
not normal and are not favorable to rebates or broad tax relief.”
Jackie Calmes contributed reporting.
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