The Stimulus Package Isn't Pretty, but It Is a Risk Worth Taking
THERE IS MUCH that we still do not know about the compromise fiscal stimulus package that has emerged from a House-Senate conference. The biggest imponderable is also the most important: Will the plan work? President Obama said that the country faced a stark choice between a massive, deficit-fueled stimulus and "catastrophe." Actually, economists are uncertain about the impact of fiscal stimulus on short-term growth, and the historical evidence -- from the New Deal to contemporary Japan -- does not settle the issue. But the president was right to this extent: The country faces a dire slump, the preferred means of dealing with it (Federal Reserve monetary policy) has been pushed to the limit, and, therefore, fiscal stimulus is a risk worth taking.
Measured by that standard, the $789 billion package presents a plausible approach. To be sure, its development was not attended by a rebirth of comity and goodwill between Republicans and Democrats. Both sides sowed distrust by hurling stimulus-related ads at each other even as they legislated. Moreover, the bill includes several components that do not appear well calculated to spur the temporary burst of spending upon which, according to economic theory, an effective stimulus depends. A "patch" to protect upper- and middle-income taxpayers from the alternative minimum tax accounts for almost a tenth of the package's cost but won't change those households' spending much since it was probably already factored into their financial plans. At the insistence of Sen. Arlen Specter of Pennsylvania, one of the three Republican centrists without whom a bill could not pass, the package includes an $8.5 billion boost for the National Institutes of Health. This might be worthy public policy, but it's not immediately clear how you jolt the economy by hiring scientists to do experiments that often take years to design and complete.
But the heart of the package is a collection of measures that do seem "timely, targeted and temporary." It includes $53.6 billion to help state governments limit tax increases and budget cuts; a 13 percent increase in food stamp benefits; extended and increased unemployment benefits; and significant tax relief for middle- and lower-income households, in the form of Mr. Obama's Making Work Pay credit, an expanded earned-income tax credit and a more generous child tax credit. There is $29 billion for roads and bridges as well; this money may not reach the economy instantly, but, given the likelihood of a prolonged downturn, it could still arrive in time to help. And, like certain other investments included in the plan, such as money for a "smart" power grid, better infrastructure could enhance the ability of the economy to grow over the long term. Thanks in large part to the influence of the Senate centrists -- Mr. Specter, and Susan Collins and Olympia J. Snowe of Maine -- some questionable provisions that had made it through the House and Senate wound up on the cutting-room floor. The final bill eliminated most of a $35 billion tax break for home buyers that would have subsidized turnover in housing rather than reduce swollen inventories. Ditto for a costly proposal to let large companies convert losses into tax refunds.
Neither product nor process was pretty. But the overall cost came in at just $14 billion more than Mr. Obama's original target of $775 billion, while the portion of tax cuts was 36 percent, only slightly below his initial recommendation of 40 percent. If Congress approves this compromise, Mr. Obama can claim a victory. And when combined with measures to get credit flowing again, it should help brake the economy's plunge.