“STIMULESS” To Pass Senate This Week

Three moderate Republican senators (Arlen Specter – PA, Olympia Snowe – ME, and Susan Collins – ME) broke ranks this weekend with their party and joined moderate Democrats to reduce the price tag of the “2009 Economic and Recovery Reinvestment Act,” better known as the “Stimulus” by approximately $100 billion or about $500 per every American adult, ending 5 days of partisan gridlock and making passage likely. The revisions only impact the spending components of the bill and reshape the make-up of the package to be 60% spending / 40% tax cuts, approximately the split between Democrats and Republicans in the U.S. Senate, which is no coincidence. Before you run out and spend your $500, here is what is no longer in the bill:
· $2.0 billion to expand high speed Internet networks
· $5.8 billion for public health programs
· $16.0 billion for school improvements
· $40.0 billion in direct aid to states

The $40.0 billion in state aid was intended to help states fill their budget gaps and reduce public sector workforce reductions in areas like education and public safety (i.e. keep teachers, firefighters and cops working). Stimulus opponents identified this as wasteful spending (better known as “pork”) and prefer that tax cuts, rather than spending, be the center piece of the program although most independent economic analysis shows government spending to have a much larger positive multiplying effect on the economy than tax cuts (analysis performed by Moody’s Economy.com and the Center for Economic and Policy Research). For example an increase in federal infrastructure spending (the median proposed spending program) returns $1.59 in economic activity for every dollar spent. In other words, $100 billion spent on infrastructure projects generates another $159 billion in additional economic activity and a little more than 1 million jobs. The MOST stimulative tax-cut, a payroll tax holiday, would add $1.28 in additional economic activity ($128 billion for every $100 billion of tax cuts), approximately 20% less than infrastructure spending. Making the Bush tax-cuts permanent, would have only a $0.31 stimulative effect ($31 billion of increased economic activity for every $100 billion of tax cuts) on the economy primarily, because they are skewed towards investors and wealthy individuals who would save the money, rather than workers who would buy stuff, thus re-circulating those dollars back into the economy, resulting in more jobs. The LEAST stimulative spending proposal is 8% better than the MOST stimulative tax cut.

While government spending can be much more efficient and less wasteful, for sure, the point of a stimulus is to help drive demand in the absence of it. The government can and should become the consumer of last resort when the public is not. While lunching at a local mall yesterday, I was struck by the seemingly full parking lot versus the sight of empty handed shoppers.

Notably missing from the package is anything addressing the home foreclosure problem, which still looms large. Administration officials indicate that issue will be addressed in the request for the second $350 billion of TARP funds expected this week.