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Economists predict stimulus effects</CENTER>
P O L I T I C O
By LISA LERER &
VICTORIA MCGRANE
February 13, 2009
As the stimulus debate closed, Capitol Hill was consumed by debate over whether the stimulus will, or won’t, succeed.
Politico took five of the largest components of the bill and asked economists of all political stripes for their best predictions.
To be sure, conservatives premised their remarks by saying they would have gone in a completely different direction by relying more on tax cuts. Liberals, by and large, would have rewritten the legislation, too, by adding more spending.
But at the end of the day, the economists concluded that anything pumping money into the economy will help in the near term.
“Most economists say that [the stimulus] is so big it will have to do some good. It will generate some GDP growth,” said U.S. Chamber of Commerce chief economist Martin Regalia.
Here’s a guide to the major parts of the two-year stimulus package and what they are intended to do:
Infrastructure Spending
The legislation allocates roughly $150 billion to improve America’s infrastructure, with nearly a third of that going to transportation related projects.
Opinion on its effectiveness is split, with some arguing it is among the strongest provisions and others saying the money will take too long to hit the economy.
This is also the section of the legislation where Republicans have identified a relatively small group of specific projects that carry the scent of pork.
- “It’s okay … [but] no matter how many shovels that are poised to go into the ground, it still takes time” for the impact to be felt, said Bill Hampel, the Credit Union National Association’s economist.
Others believe Congress structured the infrastructure spending to have a positive effect, with a descent amount of the money hitting the economy in the second half of the year.
And most concur that the longer term economic effects are undeniable.
- The economy is facing what’s likely to be a long and deep downturn, making the longer term effects of building a critical piece of the package, said Jim Horney, director of federal fiscal policy at the Center on Budget and Policy Priorities.
- Eric Rasmussen, a free market economist at Indiana University’s Kelley School of Business warns that the money could fund economically inefficient projects.
Tax Cuts for Working Families
President Barack Obama’s signature tax cut weighs in at a total cost of $116 billion over the next ten years – and it’s expected to deliver the quickest boost to the economy.
The proposal provides a $400 refundable credit for workers making less than $75,000 and an $800 credit for dual-earning couples with incomes of less than $150,000. A partial credit is paid for those making slightly more.
- The targeted nature of the proposal is what makes it effective, Horney said.
- “This money is going, in many cases, to people who are very close to subsistence,” agreed the Chamber’s Regalia. “If you give them more money, I don’t think that’s going to be saved.”
It’s also a payroll tax credit, meaning that workers will see a roughly $15 increase in their paycheck twice a month, rather than receive a lump sum rebate.
- That structure will make the tax cut more effective than the stimulus checks sent out in 2008, but the economic impact will still be limited, said Dean Baker co-director of the left-leaning Center for Economic and Policy Research.
If 60 percent of the money is spent – as opposed to saved, as happened with the 2008 rebate checks – that would add about $40 billion or so to the economy, a sizeable infusion in fast faltering retail markets.
But even that sum is actually only three-tenths of 1 percent of the country’s Gross Domestic Product, Baker noted, hardly enough to turn the economy around on its own.
Food Stamps/Unemployment/Health care
The bill includes several provisions totaling about $86 billion to help struggling workers survive the downturn.
The government will subsidize a large portion of COBRA premiums, the health care bridge for workers who lose their jobs, for up to nine months, at a cost of nearly $25 billion for workers making less than $125,000 or working couples making less than $250,000.
The bill would extend unemployment benefits from 20 to 33 weeks at a cost of $27 billion, increase those benefits at a cost of $8.8 billion, and exempt the first $2,400 of benefits from federal income taxes, which costs $4.7 billion.
Finally, the bill would increase food stamp payments by 13.6 percent at a cost of $19.9 billion.
- ”Social safety net or economic pain mitigation is perfectly appropriate,” says the conservative Heritage Foundation’s senior fellow J.D. Foster, “but they don’t have anything to do with stimulus.”
- Other economists disagree, saying the money will go into the pockets of those that need it badly because they’ve lost a job or otherwise cannot make ends meet. Their stretched budgets would effectively force them to spend their government assistance – and boost the economy.
Alternative Minimum Tax
To gain some bipartisan support for the package in the Senate, Democrats agreed to include a nearly $70 billion patch of the alternative minimum tax patch. But this is more politics than stimulus.
Congress has passed a bill preventing middle and upper-income tax payers from getting slammed by the additional tax for the past several years. As a result, few taxpayers anticipate getting hit by the tax — rendering the provision a zero on the stimulative scale, according to economists across the ideological spectrum.
- “The fact is the AMT patch is something everyone had to expect would happen, and so it had to be more or less factored into people’s plans already,” said Kevin Hassett, director of economic policy studies at the American Enterprise Institute, a conservative think-tank, and an adviser for Republican John McCain’s, presidential bid.
- Horney notes that by including the $70 billion patch and then limiting the size of the bill, Congress wasted a significant portion of their bill. “The problem is, in putting it in, then you have to limit or get rid of other things,” he said.
State Aid
The compromise bill includes a $53.6 billion “state stabilization fund” aimed at helping struggling states avoid layoffs and continue services.
The bulk of the money – more than $45 billion – goes to local school districts and bonus grants to states that meet education performance markers. The remainder is for other high priority needs such as police, fire and public safety. On top of that, states also got an $87 billion boost to help pay rising Medicaid rolls.
Many economists praise this spending as the best part of the bill since it can be deployed most quickly to stop layoffs and other spending cuts at the state and local level forced by balanced budget laws.
- Although the money will fill only half of the total budget gap in the states, the money is critical, Horney said.
- “It should have been bigger,” said Hampel. “You get some of the biggest bang for the buck” by preventing layoffs, since a dollar spent to keep someone in a job is just as effective as one spent to hire a worker – and it takes a lot less time than other forms of spending.
