The Case for Stimulus

Posted Jan. 11, 2009, at 8:35 p.m.

President-elect Barack Obama made a persuasive case for quick action to stimulate the economy after he takes office. To be most effective, however, any stimulus package should favor measures that increase spending quickly, such as increased unemployment benefits and funding for infrastructure projects, rather than tax cuts. Concerns about the growing federal deficit also are overridden by the need for the federal government to ease the effects and duration of the recession.

“For every day we wait or point fingers or drag our feet, more Americans will lose their jobs,” Mr. Obama warned in a speech Thursday. “More families will lose their savings. More dreams will be deferred and denied. And our nation will sink deeper into a crisis that, at some point, we may not be able to reverse.”

On the day he spoke in Virginia, the economic news showed a country sinking deeper into financial trouble. Retail sales were down for the third month in a row as holiday shopping at most stores failed to meet even dampened expectations.

The unemployment rate rose to 7.2 percent in December, the highest level in 15 years, according to the U.S. Department of Labor. The number of people collecting unemployment benefits jumped to 4.6 million, a 26-year high. Some economists predict unemployment could rise to 9 percent by 2010.

To stop the downward slide, Mr. Obama, the nation’s governors and many in Congress are calling for a massive stimulus package. Last week, Gov. John Baldacci proposed $3.6 billion in federal spending for Maine.

The governor urged substantial investments in infrastructure, such as roads, bridges and schools, as well as fiber-optic communications and electric transmission lines. The governor also asked for money to weatherize state facilities and private homes and for businesses to improve their energy efficiency. He also urged more federal support for food stamps, worker training and higher education.

These generally align with the proposal outlined by Mr. Obama on Thursday. The president-elect also called for doubling of alternative energy production, expanding broadband communications and computerizing medical records to save money and spur economic development.

Less promising was his continued pledge to cut taxes, including a $500 credit to individual workers. Joseph Stiglitz, a Nobel prize winning economist, said that putting funding toward tax cuts rather than government spending would diminish the benefit of a stimulus package.

Concerns about more federal spending, on top of nearly $1 trillion already committed through the Troubled Asset Relief Program and company bailouts, may be overblown. While warning that the federal deficit could reach dangerous level, the liberal Center on Budget and Policy Priorities says even a large stimulus package will have only a temporary effect on the deficit. More important, such spending is needed to turn around the dangerous economic decline that itself could increase national debt.

The gap between federal expenditures and revenues, the fundamental cause of annual deficits, could be cut nearly in half if Congress allows the tax cuts of 2001 and 2003 to expire.

Faced with the worst financial situation in a generation or two, quick and decisive action is needed to direct federal money to where it will help the most.

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