By Steven Mufson and Lori Montgomery
Washington Post Staff Writers
Sunday, February 8, 2009
With Congress moving closer to adopting a $820 billion stimulus package and the Obama administration poised to unveil a new bank bailout plan, economists say that the federal government is taking its biggest role in the economy in a generation.
States that once aspired to blaze trails independent from Washington are turning to it for money, banks and businesses that once decried regulation now are seeking federal capital, grants or tax cuts and individuals are looking for tax relief.
"This is a seismic shift in the role of government in our society," said Allen Sinai, chief global economist for Decision Economics. "Those who believe the government can be an effective, positive instrument for good will have another chance to try it," said Sinai, a political independent.
While economists remain divided on the role of government generally, an overwhelming number from both parties are saying that a government stimulus package -- even a flawed one -- is urgently needed to help prevent a steeper slide in the economy.
Many economists say the precise size and shape of the package developing in Congress matter less than the timing, and that any delay is damaging.
"Most of the things in the package, the big dollar amounts, are things that are pretty quick stimulus and need to be done," said Alice Rivlin, who was former president Bill Clinton's budget director and who criticized aspects of the proposed stimulus in congressional testimony two weeks ago. "Is it a perfect package? Of course not. But we're past that. Let's just do it."
Economists who initially rejected the need for fiscal stimulus have warmed to the idea, too. Several months ago, Alan Viard, a Bush administration economist now at the American Enterprise Institute, thought the right size for a government spending bill was "probably zero." He favored reliance on the Federal Reserve to slash interest rates and existing unemployment benefits to bolster the jobless.
Now Viard shares the view that a stimulus package is needed, although he would prefer one limited primarily to tax cuts and direct benefits for victims of the recession, such as increased unemployment benefits.
"Things have gotten so bad so quickly," Viard said. "We have now lost 3.6 million jobs, a stunning loss. But what's more horrifying is that half that loss has occurred in the last three months. This is a severe recession. There's no doubt about it."
With the deal cut late Friday in the Senate, both chambers of Congress have settled on stimulus packages with about $820 billion of tax cuts and spending increases. Both packages place a heavy emphasis on spending with federal money for states and the unemployed as well a range of targets including "smart meters" for electricity, expanded broadband access, Pell grants for education and pothole repair.
The hodgepodge of tax cuts and spending programs won't solve the country's basic problem of rot at the heart of the banking system and excessive borrowing by large numbers of people and corporations, economists say, but it might blunt some of the effects by putting cash in the hands of hard-pressed individuals and state budget planners.
President Obama yesterday welcomed the Senate compromise on a stimulus plan and exhorted Congress to hurry to finish work on the legislation that he had originally hoped to sign on his first day in office.
Despite Obama's plea, this week promises more haggling over the package. The Senate is expected to pass its version Tuesday, but then leaders must reconcile sharp differences with the House on a number of issues. The Senate proposal protects millions of taxpayers from the bite of the alternative minimum tax while slashing the amount of aid to ailing states for education spending and school construction that the House included in its plan.
Lobbyists and lawmakers were gearing up for a fight this week over remaining differences. That could make it difficult for House and Senate negotiators to meet Obama's revised goal of having a measure in place for his signature by the Presidents' Day break, which begins this weekend.
"If this is a harbinger of the future, God save us," said Robert Reischauer, president of the Urban Institute and former director of the Congressional Budget Office. "Here we are shoveling out the goodies and we can't agree on that. What happens when you have to shift the car in reverse, or deal with something like health reform or energy policy."
Obama sounded the theme of urgency in his radio address yesterday. "Legislation of such magnitude deserves the scrutiny that it's received over the last month, and it will receive more in the days to come," he said. "The scale and scope of this plan is right. And the time for action is now."
The president singled out the 16,000 estimated job gains that would result in Maine, whose two Republican senators, Susan Collins and Olympia J. Snowe, broke ranks to cut a compromise deal with Democrats. Sen. Arlen Specter (R-Penn.) also pledged to support the bill, and Democrats hope to pick up a few other Republicans when the final vote comes.
Despite a growing sense of urgency, economists across the political spectrum continue to criticize the congressional stimulus plans. Most economists agree that the Senate alterations in the plan would undermine stimulus aims. Taxpayers who fall under the AMT are generally well-off enough to be able to save some of the tax cuts they receive, delaying any positive effect on the economy. By comparison, school aid to states would probably be spent immediately to prevent layoffs of teachers.
N. Gregory Mankiw, a Harvard University economics professor who was chairman of former president George W. Bush's Council of Economic Advisers, supports cuts in payroll taxes partially offset by gradual increases in gasoline taxes. He says more time should be taken to craft spending programs that would not be wasteful.
Joseph Stiglitz, a Nobel Prize-winning economist at Columbia University and former chief economist at the World Bank, said that the stimulus package was "probably too little, especially given that it is badly designed [and] we haven't yet fixed the mortgage problem so the financial sector is likely to continue bleeding."
Stiglitz said that most households would save rather than spend the money from tax cuts and that the business tax cuts were not closely enough linked to new investments. He said that while plans for infrastructure spending were flawed, it was "unlikely to be wasted as badly as the private financial market has wasted resources in last five years."
Whatever its flaws, the stimulus package could create or save as many as 4 million jobs by the end of next year, helping to offset the 3.6 million jobs lost since the nation slid into recession in December 2007, according to an analysis by Sinai. Many of those jobs will be created in state and local government, with fewer coming in private sectors such as education and health, he said.
As a result, Sinai said, the eventual recovery will be driven by government spending rather than tax cuts -- the first time that's happened in the United States since President Ronald Reagan won election by vowing to get government off people's backs.
Sinai said his models indicated an equal mix of tax cuts and government spending would be most beneficial to the economy. If spending gets into the economy quickly, it has a sharper impact on growth, he said. And while people typically save rather than spend a portion of tax cuts, Sinai argues that that "goes to repair their financial positions . . . so that a year or two from now, they'll be in better shape to spend more." With household finances in their worst condition in years, Sinai said, it may make sense to give people an opportunity to pay down debt and rebuild savings.
But the difference in stimulus approach is not worth the cost of delay, Sinai agrees. "The greater good is to pass quickly and without confrontational disagreements a large stimulus program," he said.
In Hawaii on Friday, San Francisco Federal Reserve Chairman Janet Yellen added her voice to the supporters of quick action on a stimulus measure.
"In ordinary circumstances, there are good reasons why monetary, rather than fiscal, policy should be used to stabilize the economy," she said, citing lags in adopting and implementing government spending programs. "The result is that fiscal stimulus sometimes kicks in only after the need has passed. However, the current situation is extraordinary, making the case for fiscal action very strong."
Yellen said, "There is -- and there should be -- vigorous debate about the form it should take and about the likely effectiveness of particular fiscal strategies. However, it is critical that decisions on these matters be made on a timely basis so that the economy's downward spiral is not allowed to deepen."