Learning the details of President-elect Barack Obama's first-priority stimulus plan isn't easy when everyone knowledgeable is too busy writing legislation to talk with journalists. "Our tax counsel is talking to the chairman about that right now," is a typical response to a query. But today the veil will be lifted when Obama discusses his stimulus package in a speech at George Mason University.
We know the challenge: Unemployment is increasing, with around half a million jobs being lost each month. The U.S. gross domestic product is dropping alongside consumer spending, and credit is drying up for businesses and state governments alike. It's clear, at least in his rhetoric, that Obama understands the magnitude of the challenge. Economists generally agree that the government has to step in with a plan to jump-start the economy with countercyclical spending to assist state governments in riding out the bad times, and ensure social safety nets are strong at the time when they are most needed. Only after that can the deficit and the federal debt be addressed.
But the bigger challenge could be crafting a stimulus bill that gets through Congress and gets the job done. Obama's rough proposal, leaked to reporters over the past weeks, is targeted at $775 billion in spending over two years -- although Obama has suggested that the figure could rise to as much as $1 trillion as Congress beefs up the bill -- with roughly $300 billion coming in the form of tax breaks and the remaining amount coming in infrastructure investment and aid to state governments.
The question on the left is whether the current Obama proposal provides enough investment to turn around the failing economy. Nobel-laureate economist Paul Krugman, looking at the very sketchy details that have been revealed thus far, calculated that the result of the stimulus would be a 1.7 percent decrease in the expected unemployment rate -- only a slight improvement over the predicted average unemployment of 9 percent or even higher; Obama himself publicly worried about double-digit unemployment. Krugman also highlighted the Congressional Budget Office forecast, released yesterday, that the economy would underperform its potential by 8 percent; Obama's spending package would only make up for 3 percent of that shortfall.
It's much better than nothing, and spending that much money on worthwhile projects is a challenge in and of itself. But if those numbers are right, Obama's stimulus package may not be enough to show tangible improvements to the economy, and that could have political consequences. In 2010, Republicans would like nothing more than to be able to say that the Democrats' economic policies have had no discernible effect. GOP leaders in the House and the Senate have called for less haste on the bill, but this is a piece of legislation that is already coming months too late and will take months to reach implementation when passed; each delay extends the length of the recession. Originally, Obama had hoped to sign the stimulus legislation on Inauguration Day, but now officials estimate the package will be finished by the end of the month.
Republicans like Senate Minority Leader Mitch McConnell want the stimulus to include cuts in the capital-gains tax and tax cuts for the higher income brackets. Obama has resisted these impulses, instead focusing most of the breaks on working-class families. It's a smart move -- putting in a down payment on his campaign agenda of cutting taxes while the deficit still remains ridiculously, rather than horrifyingly, high. Tax cuts targeting lower-income Americans also promise to provide relatively effective early stimulus before the longer-term effects of infrastructure spending kick in.
But another sector of Obama's proposed tax cuts -- specifically those that allow businesses to write off the deprecation of their equipment earlier than excepted and those that allow businesses to write off losses in the last four to five years rather than the last two -- have been shown to have little stimulus effect and are little more than costly corporate hand-outs. (Obama adviser Jason Furman and incoming CBO Director Doug Elmendorf even wrote a paper last year noting the ineffectiveness of bonus-depreciation tax cuts). Another strategy offering tax rebates to employers who hire or don't lay off employees promises to be difficult to administer.
Observers suggest that these cuts are designed to lure Republicans into supporting the bill, but if that fails -- and there are no indications that GOPers are lining up to support the bill -- it will be the worst of both worlds: a policy failure that wastes money intended for economic stimulus and a political failure that provides more ammunition for the Democrats' political opponents.
On the other hand, if Republicans don't get behind the stimulus, Democrats get the pleasure of a two-for-one argument: Not only did the GOP vote against $300 billion in tax cuts, it also obstructed an important plan to salvage the economy. "This bill is as serious as deciding to go to war. No one is going to gain political points by opposing it," one House Democratic aide told me. But all this speculation depends on the success of the policy: If the economy is improving, then incumbent Democrats have very little to worry about. But if, say, a compromise bill comes out of Congress that merely alleviates the problem without seriously improving conditions, then the GOP has the ammo it needs in what could be a challenging election cycle for Democrats. Political self-interest suggests that Democrats should play it straight on this one, pushing a bill that will work and they can back on its merits.
There are fewer problems expected from within the Democratic caucus itself; while the Blue Dogs and other moderate Democrats are leery at the size of the bill, they also see the need for action and are reassured by the president-elect's nods at fiscal discipline, government efficiency, and commitment to pay-go rules. Party discipline also remains relatively strong as Obama enjoys high approval ratings.
Both sides of the aisle are promising to watch spending for the slightest sign of waste; Republican leaders find examples daily of local officials looking to fund foolish-sounding projects -- Minnesota is requesting $6 million to make snow at a ski resort -- while Democrats have banned earmarks from the bill in an attempt to find effective investment opportunities and cut out potentially embarrassing disbursements. Though it will be impossible to root out every bad expenditure with a price tag this large, doing a convincing enough job is key -- which may explain why yesterday, Obama chose to introduce his "chief performance officer," Nancy Killefer, a McKinsey executive who will be tasked with finding efficiency and streamlining government programs.
Nearly 100 members of the House of Representatives, which will take the lead on the stimulus bill, gathered yesterday to attend a forum with the chairs of each committee germane to the legislation. After remarks from Speaker Nancy Pelosi emphasizing the importance of the legislation, members took turns interviewing a number of experts, among them Mark Zandi, an economist (and formerly an informal adviser to John McCain's presidential campaign) whose calculations of the multiplier effects of government spending have become ubiquitous in discussions about the legislation. Unsurprisingly, Zandi argued for serious spending if the economy is to rebound anytime soon.
"There's no other response except a response from you, from government," he told the troubled members of Congress.
