8 Questions on the Stimulus Package

The Washington Post's Michael Fletcher talks with washingtonpost.com's Chris Cillizza on questions about the economic stimulus package.Video by washingtonpost.com
Michael A. Fletcher
Washington Post Staff Writer
Saturday, January 31, 2009; 6:09 PM

Do we really need to do this?

1. Many, many economists from across the ideological spectrum say yes, although an increasingly vocal group of free-market thinkers says no. Those backing the plan say you have to look no further than the nation's shrinking job market to understand the need for the plan to become law. The nation shed 2.6 million jobs in 2008, and the pace seems to be accelerating. Last week, corporate stalwarts including Caterpillar, Sprint Nextel, Home Depot, General Motors and Texas Instruments announced 55,000 job cuts. Overall, the economy shrank by an annual rate of 3.8 percent in the final three months of 2008.

The hope is that the stimulus plan would counter the economic contraction and mounting job losses with a huge spike in federal spending. The money would include refundable tax credits -- $500 for most individuals, $1,000 for most working couples -- which many economists think would give a boost to flagging consumer demand and provide a cushion during hard times. Hundred of billions of dollars more would go to provide direct financial relief to financially strapped states, helping them avert planned layoffs and allowing them to expand unemployment and health benefits. Other money would go into infrastructure projects, mostly road and transit construction, that proponents hope would trigger hiring, mostly in two of the sectors most affected by the economic downturn: manufacturing and construction.

Opponents counter with a basic question: Will it work?

Some think not. These analysts think that government spending would largely supplant private investment, minimizing the impact of the former on the overall economy. Meanwhile, they say, the changes would only delay difficult adjustments taking place in the economy. With the sharp declines in housing and commodity prices, they say, those goods have to find a new, sustainable pricing level, and the pain of recession is part of that realignment. The huge infusion of government spending proposed in the stimulus plan, they add, would inevitably stoke inflation and leave the government deeper in debt, hindering future economic growth. "The effect of government debt is to lower the standard of living in the future," said Chris Edwards, an economist at the Cato Institute.

Where would the money come from?

2. The money would be borrowed, adding a huge sum to the federal deficit, which is already projected to top $1 trillion, about 7 percent of the nation's annual economic output. The spiraling deficit means increases in the nearly $11 trillion national debt. The money -- much of it borrowed from foreign creditors -- would have to be repaid eventually, meaning there would be less money available for future needs. Committing to large and persistent deficit spending beyond the recession could eventually undermine the attractiveness of U.S. Treasury debt to global investors, threatening America's access to low-cost borrowing, according to some analysts.

That said, it is clear that there is no other way to pay for a stimulus plan. And without stimulus, there is a good chance that the economy could continue to shrink -- or, at best, remain flat -- for years to come. "The federal government's immediate actions will likely run counter to the longer-term goal of promoting economic growth through more adequate saving and investment," said a recent policy brief by the Concord Coalition, a nonpartisan group that advocates deficit reduction. "If properly designed, however, fiscal stimulus need not have an adverse impact on economic growth over the long term, and long-term discipline need not have an adverse impact on economic activity in the short term. We don't need to sacrifice one to achieve the other, but we need to be clear about the trade-offs."

How quickly would the money be spent?

3. President Obama has set a goal for 75 percent of the money to be spent within 18 months of the bill being signed into law. That may be ambitious. The Congressional Budget Office analysis of the $819 billion House version of the bill passed last week found that about two-thirds of the money would be spent in the first 18 months. Obama aides say they expect the Senate version of the bill to include provisions that would allow for faster payouts and that innovations in their plan would lead to more rapid spending than the CBO anticipates. The pace of spending is key to the effectiveness of a stimulus plan, as economists agree that stimulus spending must be timely to have the desired effect of "jolting" the staggering economy.

The aim to spend the money quickly is one reason the package is so heavily tilted toward tax breaks and help for states, two forms of spending that Obama economists acknowledge do not offer maximum potential for job creation. Together, those vehicles account for more than half of the stimulus plan. The administration says they have the virtue of getting money circulating in the economy quickly, maximizing the stimulative effect. The tax cuts increase the package's appeal to many Republicans, although there was zero GOP support for the plan in the House.

How would the money be spent?

4. The House plan calls for $275 billion in tax cuts and about $300 billion in aid for laid-off workers and cash-strapped states. That money would be used to expand unemployment benefits, provide health-care coverage to laid-off workers, help states facing ballooning Medicaid costs and extend large sums to states to pay for education programs and school renovations.

The House bill also includes $30 billion for roads and bridges, $9 billion for public transit and $10 billion for transit and intercity rail. It includes $50 billion intended to make the country more energy-efficient by updating the electric grid to make it easier to accommodate solar and wind power, and by providing for weatherizing government buildings and low-income housing. In addition, there are tax credits to encourage the growth of renewable energy.

In all, it may be less than the transformative spending package that some envisioned when Obama compared the huge plan to construction of the interstate highway system. Still, it would ramp up social spending in a way the nation has not seen in generations. Among those proposals are a temporary expansion of the earned income tax credit to subsidize the pay of low-income workers and a $500 increase in the maximum Pell Grant, which helps low-income students pay for college.

Where would the jobs be?

5. The Obama administration says that the vast majority -- as much as 90 percent of the jobs -- would be created in the private sector. The jobs would be heavily weighted to construction and manufacturing, which together would account for almost one-third of the new or saved jobs, according to the administration's analysis. Both of those sectors have been hit hard by the economic downturn, with the construction industry shedding more than 600,000 jobs in 2008 and the nation losing nearly 800,000 manufacturing jobs in the same time period. The administration estimates that more than 600,000 of the jobs saved or created under the stimulus plan would be in retail and 500,000 would be in leisure and hospitality industries.

African Americans, Hispanics and workers with lower levels of education, who have suffered most during the downturn, would see the most substantial benefits. The Obama administration estimates that more than 40 percent of the new jobs would go to women.

How would we know the plan was meeting its goal of saving or creating 3 to 4 million jobs?

6. Job-creation targets are one of the more slippery components of the stimulus plan. The basic answer: We could compare the nation's employment picture at the end of 2010 to what widely accepted forecasts have said it would be without a stimulus package. The nonpartisan Congressional Budget Office has estimated that without a stimulus plan, unemployment would peak at above 9 percent next year. The stimulus plan, they estimate, would save or create anywhere from 1.2 million to 3.6 million jobs by the end of next year, a huge range that underscores the fluidity of economic forecasting, particularly in volatile times. The Obama administration, meanwhile, has projected that the economy would add or retain 3.3 million to 4.1 million jobs as a result of the stimulus plan. With the plan, unemployment, now 7.2 percent, would be 7 percent at the end of next year, nearly two points below what it would be without the plan, according to the administration's analysis.

How quickly would the economy recover?

7. Even if a stimulus plan were to succeed, many economists say the nation is in for a long period of higher-than-usual unemployment and weaker-than-usual economic growth. Last year alone, the unemployment rate jumped 2.3 percentage points. The Obama administration's own projections say that the unemployment rate will not return to early-2008 levels before 2012. The reality is that the nation is recovering from the explosion of a housing bubble that has left the financial system teetering. In the process, a huge amount of personal wealth has evaporated, causing people to cut back their spending and bolster their savings, placing a drag on economic growth. A stimulus package would cushion -- not reverse -- the impact of those fundamental shifts.

Would this be the beginning of a new New Deal?

8. In a word, no. But the plan includes some efforts to strengthen the existing social safety net, most notably by bolstering aid to ensure that millions who have lost their jobs have access to health insurance. The plan also includes big increases in education spending, from preschool through college. Many see aspects of that proposed spending less as strictly stimulus and more as a down payment on Obama's campaign promise to broaden access to health care and education and to make other changes to counter economic trends that have left most Americans with stagnant incomes and mounting debt over the past eight years.

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