Note to Obama: Thinking Small Will Lead to Disaster

By Robert Kuttner, AlterNet. Posted January 12, 2009.

Part I.

1. Make sure state and local governments don't lay off a single worker or cut back a single existing program. Approximate Cost: $200 billion. Benefit: big loss to communities and workers is avoided. Capacity of local government to fight recession is enhanced.

2. Add emergency revenue sharing to states and cities by picking up half of the state share of Medicaid, which has suffered drastic cuts in eligibility and coverage. Cost $100 billion. Benefit: states can restore Medicaid benefits to more people and can get some general budget relief.

3. Have government temporarily pay most of the cost of COBRA coverage for laid off people who lose their health insurance, and allow people over age 55 to buy into Medicare. Cost: $100 billion. Benefit: unemployed people keep their health coverage, people in late middle age can buy affordable insurance, while Congress debates out how to get universal health insurance for all.

4. Expand Unemployment Insurance to cover part time workers, extend eligibility period, and increase benefit levels. Cost $50 billion. Benefit: people thrown out of work at a time of rising unemployment get more nearly adequate income support.

5. Roll back tuitions at state universities and community colleges, and increase Pell Grants--contingent on universities not increasing costs to students. Cost: $100 billion.

Benefit: young people spend the recession in college rather than clogging unemployment rolls or graduating with huge debt burdens. Colleges are spared the need to cut programs and lay off people in a recession.

6. Declare a temporary holiday on the worker share of the Social Security tax, and have government make up the loss to the trust fund, contingent on employers not cutting wages. Cost: $450 billion. Benefit: an immediate raise of 6.2 percent for all workers, with the benefit being tilted downward, since moderate income workers pay more in payroll taxes than in income taxes.

Total cost: $1 trillion.

Stimulative Effect: Instant.

So the idea that the government can't spend adequate sums efficiently or quickly is nonsense. Then, during 2009, state, local, and federal government can begin planning programs that take a little longer to realize, though the rollout could begin by summer 2009 and continue into 2010.

Part II:

7. Continue many of the Part I relief programs into a second year, as economic conditions warrant. Cost: $500 billion. Benefit: the momentum of the overall stimulus is maintained.

8. Use direct federal lending to refinance distressed mortgages, and as necessary reduce the outstanding principal amount. This can begin by mid-2009. Cost: $200 billion of subsidy; most additional debt is eventually repaid. (Roosevelt's Home Owners Loan Corporation returned a modest profit to the Treasury.) Benefits: some three million at-risk homeowners don't lose their homes. We finally put a floor under collapsing housing prices. Bondholders and banks that bought toxic mortgage-backed securities realize at least something on their investment, which currently has a market value of zero.

9. Begin planning immediately for a broad range of infrastructure programs, from traditional outlay on roads, bridges and mass transit to spending on 21st century infrastructure such as retrofitting homes, green energy, universal broadband, and smart-grid electricity systems. Spend money on worker training as necessary. Cost: $300 billion. Benefit: a more competitive economy and the generation of millions of domestic good jobs.

Total stimulus is two trillion dollars over two years, or about seven percent of GDP a year. If we spend at this level, we can avoid the worst, and a recovery can begin by 2010. Along the way, we will make life better for a lot of working and middle class people, create (or prevent the destruction of) millions of decently-paying jobs, and rebuild public systems that have gone to ruin.

A secondary benefit is that people start believing in government again. As the economy returns to normal, it should never return to the kind of unequal bubble economy that created the mirage of prosperity in the 1990s and the first part of this decade. Many of these programs should not end after 2010. We need a permanent increase in public outlay to pay for adequate levels of public and social investment. But once the worst of the recession is behind us, the increased spending should be paid for by higher taxes on wealthy people so that the budget can be close to balance over the long term. As the economy returns to broad prosperity, the ratio of public debt to GDP begins declining as it did after World War II.

Will Obama reach for the stars and embrace a program this bold? He may suffer a few partisan defeats first, and he may find himself chasing a deepening depression downward. But my guess is that eventually will get there. Let's hope that it's sooner rather than later.

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Robert Kuttner is co-editor of The American Prospect.

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