A Bold Stimulus Package -- $1 Trillion Bold -- Is Needed
When New York Gov. Franklin Delano Roosevelt delivered a commencement address at Oglethorpe University in May 1932, the economic crisis that had befallen the United States three years earlier had already morphed into the Great Depression: One in four Americans was out of work, banks were failing at a rate of 10 per week and the gross national product was at half its pre-crash level.
FDR called on the federal government to "correct, by drastic means if necessary, the faults in our economic system." The times called for "bold, persistent experimentation," he declared.
Strictly by the numbers, today's economic crisis is, fortunately, not as severe as the Great Depression was. But that's cold comfort to the millions of Americans who have lost their jobs, homes, health care and retirement savings. We are living through the toughest times since the 1930s. People reasonably expect government to act boldly.
I've spoken at length about the current economic crisis with other governors, including Deval Patrick (Mass.), David Paterson (N.Y.), Jim Doyle (Wis.), Jennifer Granholm (Mich.) and Ted Strickland (Ohio). We agree that our states -- however diverse they may be -- have similar needs and problems that should be addressed by the economic recovery package being developed in Washington. That can best be achieved if Congress and the new administration keep in mind the following principles:
First, the states, local governments and the federal government must be full partners in the recovery process. Working with counties and municipalities, states have mechanisms in place to pump stimulus funds into the economy quickly and responsibly. But we don't have the federal government's financial capacity or borrowing authority. Any recovery effort should reflect our mutual strengths.
Second, the package should be large. Some estimates put the cost of the economic crisis next year at $700 billion, or about 4 percent of gross domestic product. To offset this, the cumulative value of the stimulus plan should be $1 trillion over two years. This is a large sum, but if the spending is executed effectively, it should be a significant investment in our country's physical and human resources that will pay long-term dividends while also creating and saving jobs.
The stimulus should be roughly divided into five categories: infrastructure, countercyclical programs, housing, education block grants and middle-class tax cuts.
· For every billion dollars we spend on infrastructure, we can put upwards of 20,000 people back to work. On one hand, we've learned painful lessons about the need to modernize our bridges and levees. On the other hand, we must think broadly about the idea of infrastructure: How many hours do people waste circling airports because our air-traffic control systems are outdated? We must commit to improving our transportation system, energy grid, Internet technology, ports, public housing and school facilities.
· Unless we also help states shore up their safety-net social programs, the economic impact of the federal stimulus will be negated.
Most states are constitutionally required to balance their budgets. Given the sharp decline in state revenue, we are not able to support, let alone increase, spending to meet growing demands for basic needs such as unemployment insurance, food assistance programs and health care -- including mental-health services to those with developmental disabilities.
Most states are facing cuts to these essential services, reductions that will exact an enormous toll on our most vulnerable citizens and remove money and jobs from the economy just when we need to promote growth. Put another way, even if the federal government dedicates a large sum to infrastructure, cutbacks in state and local safety-net programs would cancel out much of the effect of the stimulus.
Over two years, the federal government should boost its countercyclical spending by at least $250 billion. It can do so by increasing the Federal Medical Assistance Percentages; the federal share of Medicaid costs; and other health-care-related programs such as reimbursement to hospitals for treating the uninsured, Temporary Assistance for Needy Families and child-care grants.
Many state unemployment trust funds are already depleted. Rising unemployment rates and reduced revenue over the next few months are likely to trigger major payroll tax increases in 2009. This harm could be partly mitigated by doubling proposed federal funding for state unemployment trust funds under the Unemployment Insurance Modernization Act, which would provide incentives to cover vulnerable low-wage and part-time workers who are often denied benefits.
· Unless we strike at the cause of the meltdown -- the collapse of the housing market -- our economy will continue spiraling downward. The federal recovery package should include funding for state housing mortgage authorities and for programs that help people restructure their mortgages, stay in their homes and find new shelter if evicted.
· If we are to pursue relief and recovery, it's essential that we continue developing a workforce that is able to meet the demands of the 21st-century economy. At least $250 billion in preschool-through-college education block grants would help states meet their school budget obligations; more important, such grants would enable greater strides toward universal early childhood education and fully funded programs for special-needs students -- improving the situation today and laying the foundation for a better tomorrow.
· A sizable middle-class tax cut is key. Over the past decade, median family income has failed to keep pace with inflation, especially given the sharply rising costs of health care and education. Most Americans have lost ground. Relief for the middle class would help our families weather the storm and also boost economic demand.
In 1932, Roosevelt warned against being of "faint heart, fearful of change, sitting tightly on the rooftops in the flood." His words are still prescient today. We must be bold -- $1 trillion bold. America has abundant resources and a generous, ambitious spirit. If we work together, we'll emerge stronger and more prosperous than ever.
The writer, a Democrat, is governor of New Jersey.