Memo to Obama: Think Bigger

There are three serious dangers in the debate about the stimulus package. The first is that President Obama will think too small. The second is that he will think too bipartisan. The third is that the public will be swayed by myths, such as the claim that infrastructure spending just takes too long to gear up, or that the deficit is the paramount problem.

The economy is now collapsing at an accelerating rate. With the 2008 job loss at the worst annual level since 1945, and even sound businesses unable to get ordinary credit from a traumatized banking system, this will quickly become a classic downward depression spiral unless government acts at a very large scale, and fast. The GDP probably shrank at a rate of at least five percent in the fourth quarter of 2008, and the nosedive will be worse this quarter.

There is simply no good news anywhere in the economy, as the costs of the financial crash keep reverberating. Yet a stimulus in the range of $400 billion a year is less than three percent of GDP. (It's bizarre that the incoming administration uses two-year numbers. They only make the figure sound too large, rather than too small.)

The reality is that we need additional spending of at least a trillion dollars a year for at least two years. The only encouraging sign is that more and more mainstream economists and Democratic politicians are starting to say that the greater risk is that we will aim too low rather than too high. Even Martin Feldstein, who chaired Ronald Reagan's Council of Economic Advisers, is a born-again Keynesian.

My educated guess is that the first stimulus package will be too small, and that as the economy-wide collapse deepens, we will be back for a second one by April or May. That would be a shame. It would be far better to have adequate stimulus now.

The Perils of Post-Partisanship

In the past week, the incoming administration has sounded almost desperate in its eagerness to enlist Republicans. First, Obama offered huge concessions in the form of business tax write-offs. Then he signaled a willingness to negotiate limits on Social Security and Medicare. While it may make some sense to reward businesses for creating jobs or for not cutting them, the idea of allowing corporations to write off more past years' losses on their current taxes is mainly a reward to the same banks that got us into this mess. Tax cuts should be part of the package, but they should go to working families.

Politically, the likelihood is that the Republicans will take whatever concessions they can get from Obama, and then try to block the spending parts of the package. Obama genuinely hopes to reach across partisan divides--it's part of his make-up--but he may have to get bloodied a few times before he realizes the folly of this approach. It would be far better for him to draft the stimulus package that he wants and that the country needs than to compromise with implacably opposed Republicans going in.

The fact is that he has a much stronger hand than the Republicans do. Families and businesses, mayors and governors, are hurting in red states as much as they are in blue states. If a trillion-dollar stimulus package is pending before Congress and unemployment is rapidly heading towards double digits, he should dare the Republican leadership to try to block it. In such circumstances, it should not be difficult to peel off the two or three senate Republicans he needs to break a filibuster.

Every reformist president has faced an early test of resolve, usually a partisan one. John Kennedy has to win a fight, by three votes, to enlarge the House Rules committee, which had been a graveyard of liberal legislation. Bill Clinton won his first budget vote, raising taxes on the top two percent, by one vote in the House with Vice President Al Gore breaking a tie in the Senate, and Republicans united in opposition. FDR needed all of his persuasive powers to rally the country and the Congress behind the fifteen great bills of his first hundred days, as did Lyndon Johnson on civil rights.

Nothing would enhance the credibility of the president-elect as much as a decisive win on the stimulus, over the opposition of conservative Republicans. If sensible Republicans want to vote with the new president, more power to them - and to Obama.

But this victory will take all of Obama's skills of leadership, and then some. He needs to explain to the people why public outlay of this scale is urgently needed, and increase the pressure on Congress to support it. At this point, however, the cause and effect are running the other way. Progressives in Congress are urging Obama to think bigger, and not to cave in to the Republicans in the name of a hollow bipartisanship.

Rep. Barney Frank recently told me, "The said this post-partisan stuff was just for the campaign. I think maybe he believes it." But Obama is no fool. Post-partisanship will last only until it's clear that Republicans will try to wreck his presidency--and they will.

Yes, We Can Spend It Well.

The most disabling myth, which you hear over and over again, is that the government can't competently spend large sums of money fast enough, and will end up building bridges to nowhere. "Infrastructure," as the main supposed form of public spending, is getting far too much attention, and is being used as a straw man to discourage adequate outlay.

Here is a trillion dollars of stimulus that can take effect instantly, and another trillion that can take effect over the course of eighteen months. For Part I, the only planning process necessary is for government to start writing checks. The estimated costs are approximations:

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.

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

 

 

Comments

[ncmom54]

Learn from Rumsfeld's underestimating mistakes.

[smharmon1]

Well, here is what we know about where the TARP money is going, how the FED handles the money supply, and what institutions (foreign and domestic) are doing with the money, wherever it came from: Almost nothing. The system we have, beginning with the Federal Reserve and this massively oversized, unaccountable federal govt, is beyond comprehension except to a few insiders. I'm not against taxation, to a point, as long as it is recognizable and audit-trailed and subsidizes an in-kind service. If we want to drive on a road, tax us there; if we use a school, tax us there. But don't tax the incomes and send that money down the Federal Rabbit Hole. Oh, if we want to fight a war, let's have a war tax. Well, that pretty much leads to a much stronger state-run system and a much weaker federal system. And, it pretty much gets rid of that Kangaroo Group known as the Federal Reserve. These doughnut-munchers can go rob someone else. Liberal, conservative, it doesn't matter--too big, too complex, and too uncontrollable, whatever it is, will fail.

[schatsie]

I still think he needs to put a cap on interest rates and fees... That will not cost the government one dime...

and allow drug importation from Canada and that will not cost the government one dime...

my fear is that he is listening to the Scrooges at Goldman and will allow them to tinker for the next 3 months and then when he has Social Security and Tax information will pull out the stops...

This depression has been building for years...I wanted to cry when I saw that Biologists are in demand... It is my understanding that a large recipient of NIH funds has outsourced 3000 research jobs to China...

[FranktheDem]

Right on, regarding interest rates. Usury is the single biggest culprit creating inequities today. Legislation should be passed instituting Usury Law that would prohibit ANY lending institution from charging more than 6% per annum. Any interest charged beyond 6% is a scam on the American People. Excess of 6% is a cancer on our society.
Usury was considered a sin 2,000 years ago. Look it up!

[Republicrats]

but what if the risk is more than 6% can support? the feds should not be in the business of dictating business rules, though I agree a usury law is vital and moral, such a low arbitrary number will make it hard for folks with bad credit to get any loans?

[KQuarksSuperKollider]

When are people going to actually listen to what Obama says?

Obama has already said the stimulus he proposed is on the low side and he expects the number to grow. It's up to congress to write legislation in the end and Obama knows that he just offered the starting point.

Obama wants to run this country by listening to people's opinions and picking the best plans to move forward. Communication is a two way street and we know Obama is listening so we should listen to what he says as well.

[Eidolas]

So the answer is to create new programs as well as maintain the existing ones. Brilliant. At least until the funding runs out, then they'll just have to raise taxes, because, after all, this stimulus money is coming out of the ether and there are very few politicians who will say "no" to a federal handout.

[SteveCox]

We can afford to run debts at a time like this. When the Great Depression hit, we had very little debt. So these Republican urban legends about balanced budgets being sound economic policy are proven wrong historically.

[Republicrats]

all we do is run debts, where have you been? we may balance a budget or two, but thats on current accounts, the national debt has sky-rocketed over the past few decades to being out of whack historically as a percentage of gdp. if republicans say it, its a urban legend? that is in and of itself an irrational thought!

[SwampeastMike]

"Think big" is correct, but Part I will merely see more of those who are able paying off their debt and more of those who can't shopping at WalMart as a pessimistic holding pattern until the big projects in part II can be studied to death.

Why not skip ahead to, "spending on 21st century infrastructure such as retrofitting homes, green energy, universal broadband, and smart-grid electricity systems"?

Millions of small projects as well?

[Savanna]

How is it possible for everyone to be sooooo negative. How can we go forward with all the "ney sayers."
And we have to go forward, anything less than that is irreponsible. Can't you people in the Press
say something postive for once?

[AngieMom57]

"How is it possible for everyone to be sooooo negative."

EVERYONE is not s0ooo negative, we are voicing and identifying the problem; in fact some of these postings are rather articulate and pose a much better solution than our elected officials seem to be coming up with, do you disagree with that?

Moving forward, yet not moving in the same direction is paramount!

"there is no difficulty that strong intellect cannot surmount. For those who win onwards there is reward past all telling-the power to bless and save humanity." HPB

[Republicrats]

We should incentivize people to save by eliminating the taxation of savings, the government gets to double-dip right now, taxing the income and again the savings. This would help get the national savings rate up.
We should incentivize people to use credit more wisely by letting lenders on new credit requests rate it as they see fit, more risk, more cost, and as we spend down our debt get even better rates as a percentage of our income.
We should incentivize employers to hire by cutting the tax rates on employers to ease the cost of doing business in the US as compared to the rest of the world.

[cylindar]

Good post but you are making the same mistake everyone else is making which is why no one has a solution available. That mistake is that you think the government can bail anyone out. They literally do not have the cash to do this. Yes, you can roll them presses but the paper going through becomes more worthless the more paper you put through it. Duh, boy is everyone in for a big surprise or what?

[tc399]

A Trillion dollar stimulus package would send every American a million dollars. Make paying off credit card debt and mortgage loans a condition. Problem solved. We are the ones who need it, not the banks. Who exactly ARE we bailing out again and with whose money?

[joebhed]

Only if there are a million Americans left standing.

[montemalone]

The lack of math skills is a big part of the problem we now face.

[RedneckDem]

ummm... I think 1 trillion divided by 300 million is about 3 thou.

It's sad that in this day and age, everyones a victim and believe they should receive something for nothing. The idea was that the bailout would allow the banks to start lending again, they didn't. The next round of money will make them or they will go bye bye or have the original loan called by the gov't. If the stimulus plan does what it says it will then we need the banks to loan money to contractors and such so they can make manufacturing orders and so on and so forth...

[pundit27]

The question is, will Obama choose to climb K2? -- Krugman and Kuttner together offer, IMHO, the appropriate rationale, spending targets, and exit strategies to make a massive government intervention make perfect sense. . . . this is not the time for half-assed correctives that do little to do just that -- correct the substantial imbalances in the world and national economies . . . .
one area I would look at more closely, though, are the 21st Century infrastucture initiatives; what are the foundational industries that can be bolstered to speed their adoption?

[entropygal]

Okay, here is my "vision and mission".

Let's put 50% women in both houses of congress (and minority numbers to reflect their population percentages) like are required in some of the third world nations that are considered so backward. Only when all voices are heard will we have a balanced approach to government.

Let's open up the doors of all these prisons and let out all of these inmates who are there mainly because they are in poverty and uneducated. We let the wealthier thieves and even those that have committed murder run free. It is so sad........

[ThePeacemakers]

He can only think bigger if he gets more advisors (assuming he has any now) that aren't from the Clinton-Move-To-The-Right school of thought.

[Erdgeist]

Robert, let's hope they understand that Keynes used all the tools he could think of including a "REVENUE TARIFF". We could generate well over a trillion dollars in two years with a sizable temporary revenue tariff that would go a long way in helping pay for the stimulus package and give people confidence.

[AndSoItGoes]

I think 350 billion thrown away to greedy frauds, educated us that prudence is wise. The money needs to come back to the tax payers who will use it more wisely than the government and so called financial institutions have.

[sonofdy1]

And these are the people now running our government. Thank god I have an out when it all falls apart due to blatant stupidity like "printing 2 trillion dollars"

out.

[joebhed]

WRONG.
First, the reason the inflation from the money supply growth is not present in ordinary inflation terms (wages and CPI) is because the borrowed money has been invested in assets, not wages.
It never made it to mainstreet.
The housing stock assets is where the inflation is hiding.
As it comes out, there will be asset price deflation, as is now going on, but we have spades more volumes of asset price deflation yet to come.
(ALT-A, JUMBO, PRIME and COMMERCIAL MBS's, ALL with their financial exotica piled on top.)

Second, "debt is different from simply "printing" money."???
Help me out there.
ALL money that has been created in this country over the past hundred years has been created as debt.
That is the nature of the insane debt-money system.
It is inherently inflationary because the system fails to create the interest due on ALL of the money created as debt - therefore constantly demanding MORE from the economy than it creates.
That excess capital demand is inflationary.
Neither Krugman, Kuttner, Baker nor Galbraith are proposing to "print" the money, as you say.
I, and Dennis Kucinich, are proposing direct Treasury-issue, a la GREENBACK DOLLARS.
So, pray tell, how can debt-free treasury-issue money be MORE INFLATIONARY than debt-money, given that in each case the amount of money issued is exactly the same?
I refer to Friedman's theory(Milton, not Tom) of the quantity of money and economic stability.
No free rides here.