The most serious charge against the stimulus package is that it does not pack enough punch. Two different camps have been making this argument over the last few weeks. Publicly, the Obama administration hasn’t really answered either one.
The first camp says that the stimulus is simply too small. The recession is likely to idle almost $2 trillion of resources — buildings, equipment and people — this year and next, yet the current stimulus will fill only $700 billion of the hole. Several liberal economists, the forecasters at Goldman Sachs and Mark Zandi (an economist whose forecasts the administration has used) all argue for a bill of at least $1 trillion.
The second camp says that, dollar for dollar, the current package is not as effective as it should be. The public face of this group is Martin Feldstein, a longtime adviser to Republicans. Rather than across-the-board tax cuts, he is calling for targeted tax cuts that people will receive only by spending money, on a new house or other items.
The administration has responded to its critics mostly by repeating its original arguments that the economy desperately needs help — which is true, but doesn’t address the criticisms. So I spent much of the last few days asking Team Obama to be more specific.
Why isn’t it pushing for a bigger package? Didn’t Timothy Geithner, the Treasury secretary, recently say, “In a crisis of this magnitude, the most prudent course is the most forceful course.” What about targeted incentives to get people to go shopping? Or why not devote more of the stimulus to the military — another idea of Mr. Feldstein’s — and other programs that spend money more quickly than, say, railroad construction?
The answers, I think, allow for some clearer judgments about the bill. Remember, the deadline set by President Obama is still nine days away. He and Congress have time to improve the package.
•
One administration official began his explanation for why the package wasn’t bigger by quoting a line from a Gates Foundation executive: Giving money away is not as easy as it may seem.
Shortly after the election, even advocates of an aggressive stimulus plan were calling for one that would cost only $600 billion. But the economy has continued to deteriorate. So the number has kept rising. The bill passed by the House last week cost about $800 billion. The price tag of the version being debated by the Senate is closer to $900 billion (about $700 billion of which would be spent this year or next year).
Either one would be the largest stimulus in history, as Lawrence Summers, Mr. Obama’s top economic adviser, says. At these sizes, finding ways to spend the money can actually become a problem.
High-speed rail cannot be built quickly. States and cities can build only so many highways. As for the military, administration officials say they asked the Pentagon for a list of temporary projects that could begin soon. But the $10 billion of spending in the current bill covers them. Military barracks can be built quickly. Fighter jets cannot, especially when defense contractors are already operating at nearly full capacity, says Gordon Adams, a national security expert who was part of Mr. Obama’s transition team.
Agencies rarely say no to more permanent financing, of course, but that’s not what the White House is offering. It is looking for programs that can get off the ground quickly and that, for the sake of the budget deficit, won’t be politically difficult to end once the economy starts growing again. That point is especially important, administration officials say, for winning the support of moderate Democrats and Republicans.
Even some of the administration’s critics buy these arguments. “It’s very difficult to spend the money quickly,” Mr. Zandi says. “There are diminishing returns.” That’s why Mr. Zandi and Mr. Feldstein are emphasizing tax cuts.
And Obama aides say they are open to adding some tax cuts that specifically encourage spending. They looked into the possibility of sending debit cards to all 150 million American households, but decided it was not yet logistically feasible. Instead, the final package may include some smaller programs, like a home-buying subsidy the Senate began discussing on Tuesday.
But targeted tax cuts — in effect, a bribe for households to spend more money — bring their own problems, officials say. One of the economy’s big weak spots right now is consumer indebtedness. Additional spending will help the economy this year, but it could also lead to more credit card and mortgage defaults — which would undermine the Treasury Department’s efforts to revive the financial system.
The core of the administration’s case comes down to four points. First, some of its critics’ suggestions don’t stand up to scrutiny. Second, the bill is, once again, getting larger and will make a major difference. “The goal was three million jobs,” Rahm Emanuel, the chief of staff, told me, referring to Mr. Obama’s promise that the stimulus would save or create three million jobs. “It achieves that goal.”
Third, as Mr. Summers said, “Fiscal measures are only one prong — one component — of our overall approach.” The response also “includes financial rescue, support for housing and global economic cooperation,” he said.
Fourth, aides say this bill is not their only bite at the apple. Mr. Obama is willing to do more in the future. Congress, facing midterm elections, may also want to pass another small stimulus package next year.
•
What are we to make of these arguments?
It is certainly true that a much larger stimulus package would create problems of its own. It’s also true, as administration officials acknowledge, that nobody can know for sure what the right size is.
Already, if you include the additional spending that will result from the jobs that the stimulus bill creates — the so-called multiplier effect — the Senate version of the bill might close about half of the $2 trillion output gap. The yet-to-be-announced programs to get credit flowing and reduce foreclosures will shrink the gap further. So if the current bill is the wrong size, it is probably not off by much.
Yet I keep coming back to Mr. Geithner’s point about force and prudence. Credit crises are terrifically nasty beasts. They have a habit of making economists look foolishly optimistic.
The odds that, a year from now, Mr. Obama and Congress will regret not having been more aggressive seem bigger than the odds that they’ll think they overdid it. Why not redouble efforts to find a few other ways to spend money quickly? More than 50 mass transit agencies across the country are cutting services or raising fares, and the stimulus bill does nothing for them.
Today, the Obama administration can still blame the Bush administration for the economy’s condition. Next year, fairly or not, that won’t be so easy.
