UPDATE: The Senate late Thursday afternoon passed a stimulus bill that adds tax rebates for 20 million elderly people excluded from the House version, as well as 250,000 handicapped veterans. Senate Democrats failed by one vote to get a stronger bill, with extended unemployment benefits, more money for food stamps, and emergency energy assistance for the poor.
Basically, the Democrats played a potentially strong hand badly. They began with a package too small and too feeble, so when it came time to split the differences with the Republicans they were vulnerable to the usual salami tactics.
Senate Democrats and Republicans are currently debating whether to pass a stimulus bill that spends $158 billion (the Senate Democratic package)—or the $145 billion passed by the House. Senate Majority Leader Harry Reid is currently one vote short of the 60 Seante votes that he needs. The battle is certainly worth waging, because it compels Senate Republicans to either vote for a slightly better bill written by Democrats, or to oppose added support for the elderly, veterans, food-stamp aid, energy assistance, and extended benefits for the unemployed.
But the sums in both bills are far too paltry, given the severe downturn that the nation's economy faces. In December, House Democrats began negotiations with the Bush White House, proposing an even smaller number—about $90 billion—than the administration wanted. After the administration indicated a desire for fast action, House Speaker Nancy Pelosi and the rest of the leadership rushed to compromise with Bush, trading away additional aid for food stamps and increased unemployment compensation in exchange for a cap in the package on tax relief for the wealthy.
The bill that passed the House weighs in at just 1 percent of the gross domestic product, in a year when joblessness is rising fast and Americans are projected to lose $2.2 trillion dollars of the value of their homes. You know you have settled for too little when you are criticized from the left by Max Baucus, perhaps the Senate's most Republican of Democrats.
Democrats are already saying that they plan to come back for "Stimulus II," and that package needs to be a lot more robust, both for political reasons and economic ones. Their initial posture signaled nothing so much as thinking small, at a moment when the economy's problems are immense and long-term.
After their accord with the White House, the Democrats got nice prime-time TV treatment with Bush, chumming it up with the hugely unpopular president who gave us this mess. When the eventual bill is signed, the Democrats would be wise to skip the signing ceremony and hold their own event, on the recovery program that the country really needs.
Why did the Democrats initially settle for so little, and what should they be promoting? Two senior Democratic legislators told me that they were pleasantly surprised when Treasury Secretary Hank Paulson reached out to them and indicated that Bush was serious about wanting legislation. The Democrats felt they needed to reciprocate. For the first time in memory, Bush actually negotiated in good faith, and split the difference with the Democrats. But there wasn't that much difference to split, since the Democrats' opening gambit was so feeble.
In part, their caution reflected the influence of the fiscally conservative Blue Dogs who insisted on a very modest package as their price for coming along at all. Another lead weight on the Democrats' bargaining position was the widespread view that the stimulus should be "timely, targeted, and temporary," lest Bush use it for more permanent cuts in the revenue base. So instead of looking forward to November, or outward to what the country needs, Democrats looked backward to the big Bush tax cuts of 2001 and 2003—whose extension was never seriously in the cards in any case.
In fact, the entire concept and language of "stimulus" misses the point—and misses a huge opportunity. A stimulus is a macro-economic concept. It is sensible medicine when the economy is in an ordinary business-cycle downturn. Government deficit spending or tax cuts can pump more money into the economy, as can lower interest rates mandated by the Fed.
But this is no ordinary cyclical recession. Rather, it is a sharp and needless economic contraction, caused by a serious blow to the financial system, which was in turn the result of deregulation. Banks' balance sheets have taken a huge hit from the spillover of the sub-prime disaster, and credit remains scarce and expensive even after several rate cuts by the Federal Reserve.
Worse, this downturn comes on top of three decades of stagnant or declining real living standards for about two thirds of Americans, and increasing insecurity of employment, health insurance, and retirement, as well as rising costs of housing, education, and energy. So instead of a modest stimulus package, we need a major recovery program, in four parts:
Stronger Anti-Recession Medicine.
First, we need increased spending at a scale necessary to make a difference, targeted to people who need it and who will spend it, as a down payment on the public investment that the country really needs. Instead of $150 billion, this year's package should total at least $400 billion. Even Dominique Strauss-Kahn, director general of the International Monetary Fund, the temple of fiscal austerity, is now calling for serious fiscal stimulus.
We should begin with better-targeted aid to people who need help, starting with greater help to low- and middle-income people in the Senate leadership package. In addition, major reform of the unemployment insurance system is also needed both to extend the duration of benefits, raise the percentage of lost income that is covered, and reach people who currently do not qualify for benefits because they are classified as part-time, temporary, or contract workers. Such legislation has already passed the House. According to the U.S. Department of Labor, every additional dollar of unemployment benefits increases the GDP by $2.20.
The one huge missing area in both the House and Senate bills is aid to cities and states. In a downturn, city and state tax revenues decline because economic activity shrinks. Since 49 of the 50 states have constitutions requiring balanced budgets, states begin cutting back on everything from local aid to help for the needy—at exactly a moment when demands for that help increase. This year, even a modest recession will cut state and local spending by at least $100 billion. That shortfall should be made up by Washington, so that state austerity programs do not serve to deepen the recession. This emergency aid would have to include a "maintenance of effort" requirement so that conservative governors do not offset the fiscal help with state tax cuts. Since this federal aid will prevent spending cuts, it will provide 100 cents on the dollar of anti-recession spending, unlike tax cuts that may go to pay down debt or buy products made in China.
Beyond short-term fiscal aid, Washington should start helping states with a long-term shortfall in deferred infrastructure investment, which runs well into the hundreds of billions. Deferred maintenance in public schools alone exceeds $100 billion.
The Economic Policy Institute has identified an initial $70 billion in short-term infrastructure projects including drinking and wastewater treatment, emergency repair to schools (which could be done this summer), road, bridge, port, and mass transit repair, and environmental upgrading. This money, to be spent this fiscal year, would be just a down payment in the backlog of deferred public investment. According to EPI, each billion dollars of local construction produces 14,000 and 47,000 jobs. On the environmental front, the government could subsidize the installation of solar panels and other energy-saving measures, and the training of workers to install clean-energy technology.
Fix the Housing Mess.
The fallout from the sub-prime mess is harming both the balance sheets of banks and the nation's homeowners. At risk are not just the roughly 2 million homeowners at immediate risk of early foreclosure, but their neighbors who face declines in the value of their own homes, and America's homeowners generally. Since August, the administration has tried three different voluntary approaches to get credit markets flowing again in bonds backed by sub-prime mortgages. But these markets remain about as liquid as molasses. Meanwhile, the voluntary process of renegotiating high rates on sub-prime mortgages is bearing little fruit, since most of these mortgage loans are no longer held by lenders but have been repackaged into bonds.
What America needs is a new Home Owners Loan Corporation, modeled on the New Deal agency that refinanced about one mortgage in five during the 1930s, and saved nearly a million families from foreclosure. Senate Banking Committee Chairman Chris Dodd has proposed a version of a new HOLC, with an initial $10 billion to $20 billion of public capital. The HOLC could buy the bonds at a very deep discount. These bonds are currently effectively worthless since there are no other buyers. The bonds could be turned back into mortgages, at a below-market rate. This would prevent millions of foreclosures, and would also allow currently vacant houses to become affordable homes.
In addition, Congress needs to enact radical regulation of mortgage markets. That will prevent the next financial meltdown. But better regulation going forward won't help the casualties of the previous collapse unless it is coupled with a public body like the HOLC that can untangle the mortgage mess.
Change the Trajectory of Jobs, Income, and Economic Security.
Merely passing a stimulus program, even at a much larger scale, will do little to alter America's deeper economic distress. For three decades, most Americans have faced stagnant incomes, increasing economic insecurity, and rising costs of the things that make it possible to join the middle class – health care, homeownership, college tuition.
We need to reclaim the managed form of capitalism that produced an economy of shared prosperity during the long postwar boom. That will require progressive taxation, re-regulation, and public outlay on a much larger scale. It will require a trade policy that serves the national interest rather than the corporate interest The Democratic presidential candidates have begun using this rhetoric. Now, they need to get more serious about the program.
When the stimulus package does pass Congress, let's be clear that it is only a down payment, and let's stop using the language of "stimulus" in favor of a bolder language equal to the challenge of economic recovery and restored broad prosperity.