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Editorial -- President-Elect Obama's Stimulus Plan

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Wednesday, January 7, 2009

THE U.S. ECONOMY is indeed "very sick," as President-elect Barack Obama put it yesterday. One indicator of its parlous state: Though companies have managed to issue an additional $300 billion worth of short-term debt since mid-October, that pickup in lending is entirely explained by the Federal Reserve's Commercial Paper Funding Facility, which is buying all of it, according to an analysis by J.P. Morgan's private banking unit. In other words, the heart of the credit market still needs government CPR. Small wonder that many economists are forecasting that December unemployment will reach 7 percent. Hence the wide consensus that the economy needs a "jolt" from Congress, soon.

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Still, it's not the end of the world that a stimulus bill won't be ready for Mr. Obama's signature on Jan. 20, as he had hoped. At $775 billion over two years, the package under discussion would represent a massive and risky expansion of the federal debt even if the government were not already running an annual budget deficit of more than $400 billion. This endeavor is not to be undertaken without due diligence and appropriate debate. As Rep. David R. Obey (D-Wis.), the veteran House Appropriations Committee chairman, told Politico, rather colorfully: "There ain't no friggin' numbers, because dozens of issues haven't been resolved."

Mr. Obama is also wise to seek maximum possible support from Republicans, even though they are in the congressional minority; the wider the political consensus behind the program, the more legitimacy and durability it will have. "The monopoly on good ideas does not belong to a single party," he remarked, refreshingly, on Monday. The president-elect's promise to devote about 40 percent of the package to tax cuts -- which Republicans like -- is compatible both with his campaign promises and with the imperative that any stimulus plan put money into the hands of those likely to spend it promptly. For example, the Obama team is considering delivering his promised middle-class tax cut via a reduction in tax withholding, which would show up in paychecks immediately -- and at minimal bureaucratic expense.

Spending tens of billions of dollars on new infrastructure such as schools, bridges and water systems could also be effective, both as a short-term economic boost and as a means of raising the country's long-term productive capacity. The problem, however, is that such a huge infusion could overwhelm the capacity of state and local governments to use it efficiently; as a point of comparison, the entire budget for the Federal Highway Administration is only about $40 billion. Spectacular waste would undercut both the economic effectiveness and political sustainability of a stimulus program. Senate Minority Leader Mitch McConnell (R-Ky.) has constructively suggested converting some or all of the infrastructure money into federal loans, which would give governors an incentive to take only what they could actually use.

The angling for pet projects has already begun in Congress, as the mere mention of so much new spending has brought out lobbyists by the score. To cite just one example -- and not a particularly egregious one -- Senate Judiciary Committee Chairman Patrick J. Leahy (D-Vt.) has called a hearing on using stimulus money to help local law enforcement. Worthy as this might be, it has only a remote connection to jump-starting the economy. Fiscal stimulus must be, as the economists' mantra goes, targeted, timely and temporary. Working with and, if need be, on the Congress, Mr. Obama must stick to those conditions.


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