Commentary: Despite Record Deficits, Stimulus Package Warranted

Although enactment of an economic stimulus package could push the federal budget deficit above $1 trillion, political consensus on its necessity is emerging. Political factions are split on the issues of how large and what form a stimulus package should take. Economists, however, indicate that targeted spending can be a powerful weapon to address recession and the effects of economic hardship on American families, even if it increases the deficit. Now is exactly the time to be enacting such fiscal policy. As the government wrestles with the true costs of the financial bailout, some commentators are saying this country cannot afford another economic stimulus package to help Americans hard hit by the economic downturn. They say that a second stimulus package could push the deficit to around $1 trillion in Fiscal Year 2009. However, targeted spending can be a powerful weapon to address recession and the effects of economic hardship on American families, even if it increases the deficit.

The growing budget deficit and commensurate mounting national debt are indeed causes for concern, even when the economy is faltering, but they should take a backseat to preventing economic disaster and blunting the effects of the looming recession on our nation's families. Since the beginning of 2008, 760,000 net jobs have been lost, 1.8 million workers have become unemployed, nearly a million more workers claim unemployment benefits, and food prices have sharply increased as real wages continue their downward slide. The credit crisis gripping Wall Street, while related to the overall deterioration of the economy, is not the root cause of the slide, and the $700 billion financial rescue package will do little to prod economic expansion. The data points are bleak and show no sign of abating, prompting ideological consensus around the need to pursue expansionary (i.e., deficit-increasing) fiscal policy.

Debate on a second fiscal stimulus package is no longer over whether or not there should be one, but rather over how big it should be and what form should it take. On Oct. 20, Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee that "with the economy likely to be weak for several quarters, and with some risk of a protracted slowdown, consideration of a fiscal package by the Congress at this juncture seems appropriate." Within hours, White House Press Secretary Dana Perino said that the administration will "remain open to the idea" but qualified Bush's support by saying "we'll just have to see...what sort of package [Congress] want[s] to draft into legislation...and see if it actually would stimulate the economy."

Bush and Bernanke appear to be in agreement with the sentiments expressed in an enlightening discussion on the National Journal website, where a cadre of economic experts, from the arch-conservative American Enterprise Institute to the center-right Concord Coalition to the left-leaning Economic Policy Institute, have responded to the question, "Is there room for fiscal stimulus?" While contention swirls around what is and is not most effective, a consensus has formed around recognizing that a deficit-increasing economic stimulus package is warranted.

Desmond Lachman, Resident Fellow at the American Enterprise Institute, succinctly states the case for fiscal stimulus:

With monetary policy rendered largely impotent by the present financial market travails, the case for early, substantive, and well-targeted fiscal policy stimulus would appear to be overwhelming. The argument that this might compromise the longer run US budget position overlooks how very much worse the US budget position would be in the event of an even deeper recession than that already in train.

The ideological cohesion around the need for a government injection of money into the economy should serve to ease passage of a second round of fiscal stimulus, but given the White House's stated opposition to aid to "individuals who may need support during an economic downturn," details on what may be enacted will certainly remain in flux.

In a meeting convened by House Speaker Nancy Pelosi (D-CA) on Oct. 13, a group of economists, including Nobel laureate Joseph Stiglitz and former Treasury Secretary Lawrence Summers, indicated that a spending package should total two to three percent of GDP, or about $300 billion. Pelosi, however, said last week that Democratic legislators were looking at putting together a $150 billion (or about one percent of GDP) bill.

Details of the contents of such a bill are murky, as House members are currently at the drawing board, but a final economic stimulus package will likely contain elements from a previous version of a stimulus bill (H.R. 7110), which was passed by the House 263-158 in September. That bill included an unemployment insurance extension and increased funding for state aid, Food Stamps, and infrastructure. House Minority Whip Roy Blunt (R-MO), however, rejected "a huge public works plan" or "bailing out states who spent a lot more money than they should have." Republicans are also maintaining their fidelity to tax cuts and drilling for oil and gas.

In a letter to Pelosi on Oct. 13, House Minority Leader John Boehner (R-OH) enumerated House Republican stimulus demands. The set of proposals set forth includes:

  • A package of tax cuts for energy production
  • Cutting corporate income taxes
  • Suspension of the capital gains tax
  • A federal government guarantee of lending among banks
  • Suspending a law that forces retirees to begin withdrawals from Individual Retirement Accounts at the age of 70½

In the Senate, Majority Leader Harry Reid (D-NV) is taking a different approach. He would use the tax code to "encourage businesses to hire more Americans here at home" while "extending tax-free unemployment benefits for those looking for work." In addition to increasing aid to states and for home energy bills, Reid's plan would also push the federal government to renegotiate mortgage terms.

A Congressional Research Service report summing up the opinions of economists on economic stimulus states that "that spending proposals are somewhat more stimulative than tax cuts since part of a tax cut will be saved by the recipients. The most important determinant of the effect on the economy is its size." The report also indicates that "[t]he primary way to achieve the most bang for the buck is by choosing policies that result in spending, not saving ... many economists have reasoned that higher income recipients would save more than lower income recipients since U.S. saving is highly correlated with income." Additionally, the report presents a set of revenue and spending proposals and their likely effect on economic growth. The estimates are derived from Moody's Economy.com economic models and predict that corporate income and capital gains tax cuts return relatively little in the way of stimulus, while spending provisions provide the most.

Whatever specific elements are included, the package should provide temporary relief targeted at those who need it most and be enacted as soon as reasonable consideration will allow. Given that the FY 2008 budget deficit was the largest nominal-dollar deficit in history, particular attention should be paid to targeting; that is, Congress should seek to get the most "bang for the buck." By appropriately directing spending at the unemployed and the underemployed, Congress can not only maximize the amount of economic aid provided by a stimulus package, but it can help the millions of families that need it most. And while adding to the national debt presents challenges to policymakers in the years to come, they must prioritize the needs of the nation by investing in its families today.

The concern about the size of the deficit will be a central issue for the next administration. Certainly, the next president should undertake every possible effort to reduce unnecessary spending (aimed heavily at military spending) and study options for reining in skyrocketing health care costs. Even though tax increases are unpopular, the next president should begin efforts to increase revenue. In the meantime, the next president should not be afraid to propose bold spending initiatives that will result in greater revenue. For example, a 21st century version of the Works Projects Administration that puts rebuilding our nation's infrastructure as a top priority would be wise deficit spending. If such initiatives generated public-private sector green jobs and critical local, state, and federal revenues, the entire nation would benefit tremendously.

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