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?

Joshua Roberts/Reuters
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.

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.

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.

For college students, the higher education tax credit is increased to $2,500 and made partially refundable – a move targeted at some 4 million low-income students. In addition, the maximum Pell Grant, also targeted to low-income students, is raised by $500 to a maximum of $5,350 in 2009 and $5,550 in 2010.

With 43 states already projecting shortfalls of nearly $94 billion for fiscal year 2010, that new funding could help save school budgets and jobs for teachers across the nation.

The new funding “sends a message of confidence to school districts,” says Rep. George Miller (D) of California, who chairs the House Education and Labor Committee.

The final package for education is down from $140 billion in the House version of the bill, which passed 244 to 188 last month with no Republican votes. In the closing hours of negotiations over a final version of the bill, House Democrats fought hard to preserve those new dollars, especially $14 billion in funding for new K-12 school construction.

But as the dust cleared, supporters of the House version of the bill said that, even at the lower funding level, the infusion of dollars for education will make a big difference for US public schools.

Even though the final bill zeroed out funding for school construction as a specific line item, “there’s so much latitude connected with modernizing, renovating, and repairing schools – and so many projects in every school district in the country – that this will help tremendously,” says Robert Canavans, chairman of Rebuild America’s Schools.

As many as 4 million jobs
The economic recovery plans aims to create or save 3.5 million to 4 million jobs. It’s a figure in range of the 3.6 million jobs lost in the US since the downturn began in December 2007.

The stimulus legislation also extends the social safety net for those who are already unemployed by extending and improving unemployment benefits.

Under the terms of the deal, laid-off workers are eligible for as much as 33 weeks of extended unemployment benefits, including a $25 increase in weekly benefits.

There’s also a 13 percent increase in money for food stamp programs, $4 billion for more job training, $2 billion to help communities buy and restore foreclosed properties, and $1.5 billion in short-term rental assistance for families who’ve lost their homes.

The plan includes some $137 billion in new healthcare spending and $85.7 billion to rebuild and repair infrastructure.

Some $30 billion for clean, renewable energy projects aims to be a down payment for a new national strategy on energy. This includes funding for an upgraded power grid, advanced battery technology, and energy-efficiency measures. New tax incentives include $20 billion for renewable energy and energy efficiency, including a tax credit of as much as $7,500 for families who buy plug-in hybrid cars. There’s $5 billion to weatherize some 1 million homes, targeted to low-income families.

Smaller tax cut for workers
To attain a compromise that would get enough support in the Senate, Mr. Obama agreed to scale back his signature tax cut, called Making Work Pay, from $500 to $400 per worker ($800 for couples filing jointly). The new tax cut, fulfilling an Obama campaign pledge, cuts taxes for 95 percent of American workers. It phases out at $100,000 for single filers and $200,000 for couples filing jointly.

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