Wednesday, January 21, 2009

No. 1 Obama Disappointment: The Stimulemon

NEW YORK, New York -- So that's it. Barack Obama is president. That's a relief. But as CNN, CBS, MSNBC and whoever else continue to marvel at how cute Obama's daughters are or for the 89th time ask Puff Daddy, Kevin Johnson and Seal how they feel about the fact that a black man is president (they still feel pretty good), somebody has to keep the president on his toes. So, as promised, we'll be doing some dirty dancing at the Stimulemon Ball to cap off the inaugural evening -- expressing why we feel the proposed stimulus package is the greatest Obama disappointment thus far.

First of all, here's my understanding of the plan, with line items expressed in $bn:

$300 - tax breaks
$177 - education spending
$102 - benefits for low-income/unemployed
$90 - infrastructure
$87 - Medicaid assistance for states
$70 - energy/science/broadband

There are three main problems with it: It may be too small; less of it should go toward tax refunds; and more of an emphasis should be put on what will streamline, transform or update the economy and workforce for the future.

1. First, size: I've hardly done my own analysis, but I haven't heard anyone effectively rebut Krugman's critique, so in my mind it stands:

Put more succinctly, as Martin Wolf of the Financial Times noted, if the CBO is estimating output to be 7% less than its potential the next two years, a stimulus of 5% is too small.

(See also the FT's Clive Crook on this.)

2. Tax refunds: $300 million, or 40% of this, is going toward tax refunds.

Over $100 billion was for businesses, which seems absolutely unnecessary. Democratic legislators seem to have realized this as well, since reports now say this part of the tax cut is in jeopardy.

The rest of the tax cut is to be directed at people in the form of $500 checks. People earning up to $200K get these. Here's the rub: These tax cuts are being given with the sole and explicit purpose that people spend them to revive the economy. In reality, very few people will spend these.

I earn substantially less than $200K, and I have no intention of spending the money. I don't think anyone but the poorest among us is going to spend this money. The problem isn't that most people don't have any cash; the problem is that they're afraid they might have less of it in a year. Giving fairly well-off people checks isn't going to stimulate anything; it'll just result in huge fiscal deficits that will take years of tax increases to pay off -- or, if not paid off, much worse consequences. (Again, Crook is smart on this issue.)

I find this part of the plan (also known as the "John Boehner part of the plan") to be the most frightening thing about it. The fiscal deficits we're facing are unprecedented and 40% of what we're now adding to them comes from greasing businesses and people who don't need the money, because John Boehner (pronounced "Boner") thinks it's a good idea? That's a big mistake.

3. Focus on transformative infrastructure that puts this $800bn toward giving us long-term economic competitiveness: Obama and his aides have put a consistent emphasis on "shovel-ready" projects, with the tacit understanding that this means repairing roads and bridges. That's not good enough. There are huge needs for long-term investment in infrastructure to amend the 20th-century infrastructure we have. Car traffic cuts billions from GNP. Port, air and rail delays hurt efficiencies (and GNP) more. Why spend billions to get a few freshly paved roads that, in 20 years, will be as cracked and congested as they are today? In a word, transportation system needs a major rethink, and lots of investment.

The current infrastructure plan seems like it will rely on fixing roads in Iowa that neither transform the economy, create new sources of long-term demand for the private sector to meet, nor streamline our efficiencies as an economy. That sort of transformative infrastructure is needed, as Joe Garreau wrote last year in the Wilson Quarterly, and as cities like New York are strongly urging Congress -- with some success -- to undertake.

Fired up and ready to go: Congress passed this idea for a system of regional high-speed train networks in October 2008

Moreover, despite what Congress takes as conventional wisdom, this can all be done quickly, since many people have spent many years thinking about it (including banker and diplomat Felix Rohatyn).

Let's also take a big step back into the fun land of fiscal deficits. As Martin Wolf has harped on, the country's biggest problems down the road will be the deleveraging and growth in the private-sector "real economy" needed to fix the current-account structural deficit. Deleveraging isn't really the purview of the stimulus, it's more to do with TARP. But creating real growth hinges on finding new sources of demand and new ways to be competitive. New sources of demand come about when you have a transformative public-works package. Putting tar on roads in Alabama does not do that. Investing in public-private high-speed train lines does: It creates demand to employ large numbers of people to build items for which there is a long-term, constant need.

NYC alone has tens of billions in backlogged large-scale mass transit and other projects (and many worthy smaller ones), which are getting dusty as the city's own coffers run dry, deprived of real estate income from bankers buying condos. And the country as a whole should be reconnected by rail to improve regional commerce and make it more attractive for people to travel from, say Cleveland to Kansas City on business (since commercial air service is dying in second-tier cities), or to manufacture and ship things quickly and cheaply to other cities in their own region.

So what do we do? Well, take that $300M in tax cuts, and slash it. Give people earning $40K and less the $500 checks, because they'll spend them. Don't give them to the rest of us, because we won't. Let's say that's about $140 billion in tax cuts. We take the leftover $160 billion and give it to infrastructure -- transformative infrastructure -- so that what we have looks like this:

$140 - tax breaks
$177 - education spending
$102 - benefits for low-income/unemployed
$87 - Medicaid assistance for states
$70 - energy/science/broadband
$250 - infrastructure
............$50 billion - traditional infrastructure
............$175 billion - new/ "transformative" infrastructure
..................................$100 - mass transit (high-speed intercity rail, light rail, subway, BRT)
..................................$25 - airports (renovations, new airports/runways in places like NYC)
..................................$25 - ports
..................................$20 - sustainable construction (urban infill, brownfields, green buildings
and, most importantly, mass-transit hubs -- high-density mixed-use
development built around transit stations; to be achieved primarily
through tax incentives)
..................................$5 - public art projects (see WPA precedents)
...........$25 - "manufacturing infrastructure" -- in the form of funds for research into advanced
manufacturing processes and greentech research to create the infrastructure for a large new class of jobs; biotech/health, defense and space research could also be eligible for these funds

How do you manage this? Public-private partnerships should be sought out as a way of determining what sort of projects can make money and should be pursued. Additionally, giving infrastructure into private management cuts down on public costs in the years to come.

And a blue-ribbon Infrastructure Reinvestment Bank should oversee funding decisions on what what big-ticket (>$500 million) items get built, not congressmen or state governments. Only that way would Obama cut down earmarks and focus on projects that would benefit the long-term structural competitiveness of the economy.

Other creative ideas abound; clearly, repaving Alabama backroads like Cool Hand Luke is hardly the only way to guarantee that projects with an immediate impact on the economy are chosen. The only benefit of those "shovel-ready" projects is for the congressmen who get donations from construction companies (aka the Mob) that are too thick to think a little bit more creatively.

In short, there is no shortage of ways to spend money that could put people back to work and meet long-needed structural demands of the economy/society. Bush famously didn't invest in this country for eight years. Obama was elected to do that, and now he's bending over backwards to compromise with Boehner and McConnell. And what we seem to be getting is an Obama who doesn't want to be Obama, when he was resoundingly elected to be just that -- himself, and not Bush.

The WSJ/NBC poll shows that Americans by a 2-to-1 margin think the stimulus should have more public spending and less tax refunds than it does -- alas, Mr. Obama is forcing us to take money we don't want because we know we won't spend it and that what we need is structural change to create medium- to long-term jobs growth.

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