Obama weighs a supersized stimulus plan

His team looks ready to spend at least $675 billion on projects to jolt the US economy.

By , Staff writer

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    President-elect Barack Obama unveiled his economic policy team November 24 in Chicago. Many economists agree that the US economy is in such dire shape that it needs a significant jolt.
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President-elect Obama’s economic recovery plan is growing into a stimulus bill so large that it is likely to go where no such government efforts have ever gone before.

Current estimates for the stimulus legislation’s cost range from $675 billion to $850 billion. If it clears Congress, it would rank as one of the most expensive single bills ever passed by US lawmakers.

The US economy is in such dire shape that it needs a jolt of surpassing size, according to incoming administration officials. Many economists outside government agree.

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Still, the rapid expansion of Mr. Obama’s plan has generated worry in Washington that it could evolve into an inefficient mash-up with many wasteful individual projects. Plus, no one really knows exactly what will happen if the government pumps this much money, this fast, into the economy.

“This is largely unexplored territory,” says Tyler Cowen, an economist at George Mason University in Fairfax, Va.

Before he left for a two-week holiday in his native state of Hawaii, Obama approved an increase in the employment goal of his recovery effort from 2.5 million to 3 million jobs.

The move came after a four-hour briefing from economic advisers who laid out a bleak forecast for coming months, with unemployment possibly passing 9 percent. (It’s currently at 6.7 percent.) Christina Romer, incoming chair of Obama’s Council of Economic Advisers, argued that the US is facing its most severe recession in 50 years, said transition officials.

The nation could lose 3 million to 4 million jobs over the next year if the government does not act, Ms. Romer said.

Aides for Obama and Democratic allies on Capitol Hill plan to flesh out details of the plan in coming weeks, hoping to have it ready for immediate action after the next Congress is sworn in on Jan. 6. Transition officials have talked of new federal investments in healthcare, education, and energy that might have a stimulative effect. Specific ideas include weatherizing 1 million homes, shifting to a paperless health system, investing in disease prevention, and modernizing schools.

During his campaign for president, Obama talked of a stimulus package of $130 billion, or thereabouts. Now the base price of the effort, which is likely to include aid to state and local governments and expansion of unemployment benefits, is about $650 billion.

Congress is expected to add projects of its own, meaning the final price could hit $850 billion, say some Obama aides.

The president-elect himself has declined to talk exact dollar figures. But on Dec. 19 he said, “We’re going to have to be bold when it comes to our economic recovery package.”

Many economists say a stimulus package is urgently needed. By directing money to areas such as infrastructure repair and other public-works efforts, Congress can both stimulate the economy and serve valuable public needs, argue Brookings Institution economists Jeffrey Kling and William Congdon in a recent analysis of the nation’s economic problems.

“Relief cannot come soon enough. Few economists believe the worst is behind us,” wrote Mr. Kling and Mr. Congdon in their Dec. 2 study.

But whatever the need, the effort is without precedent, meaning that it’s hard to predict what will really happen, say other experts.

It’s difficult to find examples of successful fiscal stimulus driving an economic recovery, says George Mason University’s Dr. Cowen. The New Deal does not count, he says, because US fiscal policy at the time was not expansionary.

Plus, there may be a disconnect between Obama’s emphasis on helping the unemployed and the nature of some of the planned spending. Spending meant to push a system of paperless health records in the US is well and good, but will jobs in that sector go to laid-off retail workers, for instance?

“Are you really targeting the people who are out of work? It’s a leap of faith,” says Cowen.
Then there’s the problem of “pork.” The stimulus bill will not be subject to congressional rules that call for spending cuts in other areas to offset its cost. For this and other reasons, the bill will be the most attractive piece of legislation on which to hang pet projects that lawmakers are likely to see this year – perhaps even at any time in their careers, given the size of the spending effort.

Obama’s transition team is well aware of this risk. It points out that congressional leaders have vowed to keep the stimulus bill devoid of “earmarks,” individual directions from lawmakers about certain projects they want funded.

Infrastructure projects can take a long time to get going, so the emphasis will be on shovel-ready efforts that can break ground in months, say supporters of the stimulus effort.

But if a public-works project is shovel-ready, it probably is already in line for state or local funding, according to an analysis by the Heritage Foundation, a conservative think tank here. No sensible state would waste money on design costs of a new bridge, say, unless it is prepared to proceed with the project, argued Heritage. That means federal dollars will simply supplant state or local ones, with no net economic effect, in this view.

So far, the stimulus “is full of ideas that have proved not to work in the past,” says Heritage economist William Beach.

Associated Press material was used in this report.

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