More funds in Americans’ hands will spur economy

By Nicole Witherbee, Special to the BDN
Posted Feb. 02, 2009, at 6:37 p.m.

How can the new president and Congress breathe new life into our economy? They could lower federal interest rates … oh wait, they already tried that and rates already are effectively at zero percent. They could cut taxes … wait, they tried that last spring and it didn’t work. It appears that what’s left on the table is the recommendation made by hundreds of renowned economists from all political persuasions (Keynes, Krugman, Zandi, and Orzag just to name a few).

The economy is collapsing because private spending has come to a grinding halt and that has removed demand from the market. As many economists have pointed out, what’s left is government spending: $819 billion is a lot of money but nowhere near the loss in private spending. Congress needs to pump up demand through direct government spending and by putting money into the hands of Americans who will spend it.

By pushing an economic recovery plan that targets ordinary people and lays the groundwork for future generations we may still have a chance to recover from this recession and be stronger than when we started.

This is not spending gone wild; it is indispensable stimulus that will protect American families, create demand in a market exchange system and make us more competitive as a nation. The push back on this economic recovery plan has no legitimacy from an economics perspective. It serves only to reintroduce partisan politics into a new Congress and we don’t need those old games at a time like this.

Mainers are losing jobs, watching their investments shrink, all while their grocery bills grow. The state has worked to balance its budget by becoming more efficient and cutting services. This year Gov. John Baldacci and the Maine Legislature are going well beyond those cuts to make up for the growing shortfalls projected for both the fiscal 2009 and the 2010-11 biennium budgets. After cutting some $140 million from the fiscal 2008 budget, Maine had to close a revenue gap of some $166 million in the current fiscal year (2009) and is looking at a $838 million gap over the 2010-11 biennium.

The state budget cuts required to offset these revenue shortfalls will diminish the safety net needed in these troubled times, leaving people without the ability to buy basic necessities and further removing demand from the market. Federal assistance will make an enormous difference in the near-term prospects both for Maine families and for the state’s economy but only if the Legislature does not undermine those efforts with more large cuts.

The House and Senate economic recovery package proposals unveiled last week represent three helpful categories of stimulus: a stronger safety net for people who are particularly vulnerable in this recession, state fiscal relief, and refundable tax credits and a fourth category that we will call useless tax breaks. These first three categories are the areas that provide the highest level of stimulus, because they actually affect demand. The last category is buying political will. No matter how many tax breaks and incentives you give to businesses if they don’t have the customers, they won’t survive.

With more than a billion dollars of federal aid ready to flow into Maine to help shore up our public structures and soften the blow of budget cuts, create opportunities to invest in research and development, and extend loans for first-time homeowners. There is also money available to working families through the Making Work Pay tax credit (in both the House and Senate proposals) and the child tax credit (included at different income levels in the House and Senate proposals). The Making Work Pay tax credit would put up to $500 into the hands of almost half a million Mainers and the child tax credit could benefit as many as 54,000 children (House proposal) or 43,000 children in Maine (Senate proposal). Low-income families who are struggling to feed their children will see increases in food stamp benefits, and those who have lost their jobs will find a stronger unemployment system. That’s the potential for a whole lot more customers in local markets — likely to spend on purchases from our small Maine businesses.

With all of the resources and effort being generated in our nation’s capital, it would be a shame to waste it all through cuts to critical public structures, reducing the very demand that Congress is working to create. At the state level we have to balance our budget but we cannot afford to lose more ground due to large cuts. There are other options to put on the table but it will take true leaders to make those options a reality (think rainy day fund and bonding).

Big problems demand big solutions not the same tired answers. We should get behind the Federal Economic Recovery Act and follow their lead by investing in future economic growth.

Nicole Witherbee is the federal budget analyst at the Maine Center for Economic Policy.

http://bangordailynews.com/2009/02/02/opinion/more-funds-in-americansrsquo-hands-will-spur-economy/ printed on September 16, 2014