Economy

We've Got to Fight the Naysayers Against Obama's 1$ Trillion Stimulus Package

While there's no shortage of good uses for a huge stimulus package, there's going to be plenty of opponents standing in its way.

President-Elect Obama wants an economic stimulus bill on his desk when he takes office. But first he will need to contend with naysayers and win over public opinion so that he can bring along wavering legislators.

One naysayer argues that now is not the time for government to be spending more money. Republican Senator Lamar Alexander of Tennessee said of a proposed stimulus package in the range of a trillion dollars, "I don't even want to think about a number that big." However, with so much of the private economy in free fall, substantial public spending is the one source that can restore demand while the banking system is nursed back to health.

Others contend that government is not capable of spending large sums efficiently in short order. "It's ... hard to spend $700 billion quickly," says New York Timescolumnist David Brooks. "If you've got a tiddlywinks hall of fame, they're going to fund that thing."

Excuse me, but state and local governments and school districts are likely to suffer a revenue shortfall approaching $200 billion by next year. All the federal government has to do is write a check to cover that amount, and not a single policeman, firefighter, teacher, or first-responder need be laid off; not a single human service office closed; and not a single public project deferred.

These are not new projects that take time to conceive and plan. This is about preventing layoffs and shutdowns of existing public services. And while Washington is at it, the feds could help nonprofit social service agencies that are reeling from cuts in charitable giving and foundation endowment losses.

According to Anne Gelbspan, a Boston nonprofit community developer, finance for "shovel-ready" affordable housing projects has dried up. That's because Congress foolishly structured the nonprofit housing system to depend on tax credits for private financiers -- who are now too traumatized to lend. If Washington substituted direct lending, these projects could move forward.

And even if universal health insurance is too heavy a lift for Obama's first hundred days, part of the stimulus could go to community health clinics, which are already stretched to their limits.

An emergency infusion of federal cash could make public universities affordable again, and increase the value of Pell Grants. It's far better to have young people attending classes (and not graduating saddled with huge debts) than to have them clogging unemployment rolls.

Another easy way of raising purchasing power is a temporary cut in the payroll tax. That's a quick 6.2 percent after-tax raise for all workers. To qualify, businesses would have to resist the temptation to cut wages or employee benefits.

Still other doubters worry about increased deficits rekindling inflation. However the main worry today is deflation, ruinous falls in prices that leave assets worth less than their debts.

Amazingly, the government's current borrowing cost on 30-year bonds is around 2.5 percent. That means private investors are willing to lend the government money for 30 years at a very low yield. If markets anticipated inflation, they would be demanding higher rates.

The government should sell lots of these bonds, and lock in a low rate. The national debt is going to have to rise for a time -- the alternative is a depression -- and the government might as well finance that debt cheaply.

Once recovery comes, more credit will begin flowing to private investments again. There will no longer be a stampede into the safety of Treasury bonds, and government borrowing costs will rise. By then, the government can begin paying down debt, as it did after World War II.

So there is no shortage of good uses for a $1 trillion stimulus package, and no shortage of funds to finance it. There may, however, be a shortage of political will. And that's where the exceptional leadership of the new president will face its first big test.

Christmas 2008 is looking like the work of Ebenezer Scrooge. With some luck and leadership, Christmas 2009 may feel like a season of renewed hope.

 

Robert Kuttner is co-editor of The American Prospect. His new book is "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."