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What stimulus bill can, and can’t, do

The $789 billion plan cuts taxes and shores up safety net. But how long will its benefits last?

By Staff writer / February 12, 2009

Speaker of the House Nancy Pelosi and House Majority Leader Rep. Steny Hoyer (D) of Maryland spoke Wednesday about the stimulus package on Capitol Hill, where lawmakers compromised on a $789 billion deal.

Joshua Roberts/Reuters

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Washington

Congress is on track to approve a $789 billion economic stimulus package that eclipses all the war spending since US forces set foot in Iraq.

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With bank credit still mostly frozen and consumer confidence in a trough, President Obama persuaded enough lawmakers that the only thing left to revive the economy is a massive infusion of government spending – and fast.

The plan set to clear Congress by week’s end includes $282 billion in tax cuts and the remaining $507 billion in spending on issues ranging from education and road repair to a bigger social safety net.

When not loaded with “pork-barrel” spending, a stimulus plan is supposed to be “timely, targeted, and temporary” – a formula both Democrats and Republicans adopted as they worked on this legislation. But the bill’s supporters and critics alike note that Congress is navigating uncharted waters, given the severity of the recession and the mammoth intervention by government.

The gap in gross domestic product between where the economy would be without a credit crisis and where it is today is about $1 trillion, many economists say. There’s no established template for how to pull out of a gap of that magnitude.

The $789 billion is “certainly enough to make a difference,” says Chad Stone, chief economist at the Center on Budget and Policy Priorities in Washington.

With the exception of a $69 billion provision to fix the alternative minimum tax for 2010 – a move that he says will not stimulate the economy – “there’s over $700 billion of good stimulus. It won’t turn the economy around on a dime ... but it will certainly soften the downturn.”

Others, still looking over the details of the final plan, say the bill is not the right scale and scope to turn the economy around.

“It’s too much of the wrong thing. All these tax cuts won’t do a lot of good,” says Peter Morici, a business professor at the University of Maryland. “We really need more of infrastructure spending – those [projects are what] put people back to work.

“At best,” he adds, “the impact will only be temporary. We have to fix what got us into this mess, and that means fixing dysfunctional banks and our huge trade deficits with China and foreign oil producers.”

But for families, businesses, students, and unemployed workers, the plan poised to clear Congress sets up resources barely unimaginable in the recent years of diminishing discretionary spending.

A boon for education
New education spending alone is close to $100 billion. It includes $40.6 billion to local school districts to avoid budget cuts and layoffs and to upgrade schools, plus $5 billion in bonus grants to states that meet performance measures under the federal No Child Left Behind Act.