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Stimulus Update—Feb. 2—Party Stands on the Issues

Congress is racing to see if it can pass an effective plan to revive the rapidly failing economy before it plunges even further. Nearly 2 million people have lost their jobs over the last four months of 2008. In December more than 11 million people were unemployed—1.4 million of them age 55-plus.

Already there are signs that the Senate may overhaul the $819 billion economic stimulus measure that the House passed last week. Despite President Obama’s hope for a “postpartisan” consensus to address spreading economic misery, the debate is following mostly Republican and Democratic rhetoric.

To finalize a massive bill to kick-start the stalled economy, the Senate will first have to confront two long-standing and deep-seated ideological debates:

• Is it more effective to jerk the economy back to life by cutting taxes, which puts more money in consumers’ pockets, or by getting the government to spend billions directly to create new jobs? Democrats tend to favor more spending; Republicans, a smaller government.

• And does the economic crisis mean the government should simply spend money to create work, or should it use the emergency to develop longer-term policies that may add a legacy of bigger government and higher costs down the road? With a new president and a new electoral mandate, Democrats see the economic crisis as an opportunity to develop longer-term initiatives on health care and energy efficiency.

About one-third of the stimulus bill as currently passed by the House—some $275 billion—would be allocated to tax cuts, a signature element of Obama’s campaign. The bill would offer a credit of up to $500 for individuals and $1,000 for couples, and would enter the economy’s bloodstream rather quickly because it would temporarily reduce the amount of wages employers withhold from workers’ paychecks.

However, many Democrats in both chambers of Congress think the bill offers too many tax cuts and would prefer to spend more aggressively to build roads and prop up the housing market, which has collapsed from the weight of massive foreclosures. “I never saw a tax cut fix a bridge. I never saw a tax cut give us more public transportation,” said Massachusetts Democrat Barney Frank, chairman of the House Financial Services Committee. “The fact is, we need a mix” of both tax incentives and bold public spending, he said yesterday on ABC’sThis Week.

But Republicans like Sen. Jim DeMint of South Carolina see the stimulus package as an attempt to permanently, and dangerously, expand the size of government. “This plan is a spending plan. It’s not a stimulus plan. It’s temporary, and it’s wasteful. And a lot of the spending is going to end up being permanent,” DeMint said. Tax cuts, he insists, are more effective. “You can look back in history, and leaving more money in the economy through tax cuts” leads to higher growth, he said.

Economists who measure these things calculate the so-called multiplier effect generated by extra government spending. They try to estimate how much extra bang is produced for every additional buck. After the last round of Bush tax cuts, the consensus estimate was that every dollar of taxes cut yielded only 30 cents in spending—because many Americans tended to use the additional money to pay down consumer debt or put it in the bank rather than rush out to spend it. Martin Feldstein, a conservative economist at Harvard, estimated that only about 15 percent of last year’s tax rebates led to additional spending.

By contrast, spending additional sums on infrastructure like roads and bridges generates an additional $1.59 for every dollar spent, according to Mark Zandi of Moody’s, assuming the funds can be allocated quickly enough on what Obama now calls “shovel-ready” projects. Even some liberal economists such as Princeton’s Nobel laureate Paul Krugman wonder whether government can spend so much money so quickly without wasting a good portion of it.

Economists also believe that when additional funds are targeted to those who need it most, like the poor and older people, recipients tend to spend the funds more readily. Thus, the House plan offers the states $87 billion to offset rising Medicaid costs and roughly $43 billion over two years to extend and increase unemployment benefits. The bill also adds as much as 33 weeks of unemployment benefits for states with the highest unemployment rates.

So while some Republican legislators complain that the bill’s spending component is excessive, the nation’s governors last week demanded that the Senate act quickly.

“States are facing fiscal conditions not seen since the Great Depression—anticipated budget shortfalls are expected in excess of $200 billion,” the National Governors Association said in a statement. “Governors … support several key elements of the bill critical to states—increased federal support for Medicaid, and K-12 and higher education; investment in the nation’s infrastructure; and tax provisions to spur investment.”

Expect an open but contentious debate on the Senate floor, though Democrats, who control both houses of Congress, have pledged to their new president that they will complete action before a scheduled congressional recess on Feb. 13. But few are booking their tickets home quite yet.

Michael Zielenziger is based in Oakland, Calif., and writes on business and the economy.


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