Bringing us from bad to better: Next stimulus plan must be adequate in scale and implemented quickly

Policy Memo #136

The economic well-being of millions of American families hinges on getting an effective stimulus package into the system quickly. While this will not solve all economic problems facing working Americans, failure to act is guaranteed to make things considerably worse. To this end, President-elect Obama should have a robust package ready to go as soon as he takes office, something he has acknowledged is a priority.

The U.S. economy has gone from bad to worse. The rate of job losses has accelerated sharply, unemployment insurance claims are at a 16 year high, the credit crunch remains in full swing, the housing slump continues to drive foreclosures and price declines, and consumer spending—70% of the U.S. economy—just contracted for the first time in 17 years. Economists and policy makers agree that an aggressive recovery package is necessary. The stimulus package should be in the range of $300 to $500 billion, and the two-year time frame discussed by the president-elect and his advisors is correct, given the severity of the crisis.

The stimulus plan needs to offset job losses that have surpassed one million this year, and are climbing quickly (more than 200,000 per month since August). Unemployment is forecast to reach 9% by the end of next year. Given the threat of massive job losses if domestic automakers are forced to shut down production in the near-term, even this forecast (which would mark the highest unemployment rate since the recession of the early 1980s) could turn out to be optimistic.

Such high levels of unemployment are associated with a broad set of negative outcomes. Poverty rates could climb above 15% from their 2007 levels of 12.5%, and the income of low- and middle-income families could fall by as much as 6% to 8%, according to historical relationships between these variables. African American unemployment, already in double digits (11.1% in October), could go up as high as 17%.

President-elect Obama’s announced intention to create 2.5 million jobs through a recovery package focuses on infrastructure investment, aid to states, and tax cuts targeted at working families. Though the Obama team has not discussed the cost of such a package, it clearly has to be both large enough and long enough to offset the deepening problems noted above. At this point, a two-year plan costing more than $300 billion is necessary. How much more depends on the length and the depth of the ongoing downturn. Some economists and policy makers have suggested the need for investments of up to $700 billion.1

In the interest of getting the biggest bang for the buck in terms of job growth, the package should focus less on tax cuts, which tend to have smaller multiplier effects and more on direct spending. We recommend the following:

  • Aid to states. In an economic downturn, state and local governments are forced to cut services, increase taxes, or both. Such changes would make the recession both deeper and longer. A survey of state governments indicates that shortfalls will reach $72 billion in 2009,2 and the outlook for 2010 is no brighter.
  • Infrastructure spending. Rebuilding our national roads, bridges, schools, and water systems should be a high priority. By focusing on repair and “ready-to-go” projects, we can create new jobs now while investing in the economy’s future. Several areas of investment have already been identified as ready-to-go:
    • Ongoing transit projects: 246 projects totaling more than $3.6 billion could be implemented within 90 days of federal funding (American Public Transportation Association).
    • New transit projects: Approximately 400 projects totaling $248 billion are proposed, with 58 of those—totaling $25.2 billion—far along in the planning process. Most of the 58 projects have already completed the environmental review process and could be started within 4 months to a year (Reconnecting America).
    • Highway: 3,000 projects totaling $18 billion are ready and waiting for financing (American Association of State and Highway Transit Officials).
    • Bicycle/pedestrian projects: $325 million in ready-to-go projects have been identified (America Bikes).
    • Fleet Greening: $3.9 billion could be spent quickly for clean vehicles and retrofitting existing vehicles with green technology (Transportation for America).
    • Wastewater treatment projects: $4 billion in ready-to-go projects have been identified (National Association of Clean Water Agencies).
    • School repair and maintenance: $10 billion could be spent this summer (Economic Policy Institute).
  • Assistance to those hardest hit by the recession. Congress has already worked to extend unemployment benefits to many people who have lost their jobs. Expansion of food benefits would also help stimulate the economy by providing additional purchasing power to those most likely to spend it quickly.
  • Down payment on long-term reforms. Moving the economy to a low-carbon platform will require extensive investments in energy efficiency and alternative fuel production. Investing today will both create jobs and secure our nation’s energy future.

1. See Lori Montgomery’s “Democrats’ Stimulus Plan May Reach $700 Billion” from the Nov. 24, 2008 Washington Post.

2. See Elizabeth McNichol and Iris J. Lav’s “State Budget Troubles Worsen” Center on Budget and Policy Priorities, November 12, 2008.

See more work by Jared Bernstein