/PRNewswire-USNewswire/ -- Since a decline in overall demand is the main cause of rising unemployment and the weak economy, the economic recovery package should focus on putting money in the hands of people who will spend it quickly, according to the Center on Budget and Policy Priorities.
Most economists agree that two cost-effective ways to do this are by helping hard-pressed families, such as those with low incomes and those that have experienced layoffs, and helping states avert steep budget cuts and tax increases that would reduce overall demand. In fact, these measures would do more to protect jobs and the economy than the business tax cuts and certain other measures that some in Congress are promoting as "job creators."
These conclusions are widely shared among economists. Mark Zandi, chief economist for Moody's Economy.com and a former advisor to presidential candidate John McCain, endorsed them earlier this week, stating: "To provide the largest bang for the buck, a well-designed stimulus plan should include a temporary increase in government spending... The most efficacious spending includes extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to hard-pressed state and local governments."(1)
-- Poor families are more likely than businesses or higher-income families to spend quickly any new income they receive. The Congressional Budget Office has stated that "the efficacy of fiscal stimulus depends critically on households' tendency to spend the income placed in their hands."(2) CBO has also stated, "Lower-income households are... more likely to be among those with the highest propensity to spend. Therefore, policies aimed at lower-income households tend to have greater stimulative effects."(3)
The reason is simple. Families that are having difficulty affording food, shelter, and other necessities will spend any new income they receive to cover those basic costs. Higher-income families, in contrast, are likely to save more of any extra income.
So are businesses. As Goldman Sachs has stated, "companies don't spend money just because it's there to spend. To justify outlays for new projects, the expected returns have to exceed the costs, and that usually requires growth in demand strong enough to put pressure on existing resources."(4) This is why a 2008 CBO analysis comparing different stimulus proposals put corporate tax cuts in the lowest category for cost-effectiveness.(5)
-- Food stamps and unemployment insurance are two of the most effective forms of stimulus. The CBO analysis cited above put expanded food stamps and unemployment insurance in the highest category for cost-effectiveness as stimulus. "Additional [food stamp] benefits are likely to be spent rapidly by recipients, who tend to be experiencing periods of economic difficulty," CBO noted.
As for unemployment insurance, then-CBO director Peter Orszag told Congress in 2007 that "research has shown that the unemployment insurance system is among the most effective dollar-for-dollar economic stabilizers that we have in terms of counterbalancing periods of economic weakness."(6) Supporting spending by unemployed workers in hard-pressed communities helps prevent the spread of layoffs and loss of jobs in those communities.
-- But unemployment insurance reforms are needed. Fewer than half of unemployed workers actually receive jobless benefits because the unemployment insurance program, designed in the 1930s, is seriously out of date in many states. Most states, for example, require applicants to look for a full-time job, even if they are parents raising very young children and were working part-time before being laid off. These laws -- designed when most workers were married men who were the sole breadwinners for their family -- particularly disadvantaged women, who are much more likely to work part-time than men.
Congress is considering financial incentives to encourage more states to adopt reforms that would allow more part-time and other laid-off workers to qualify for benefits. States that adopt the reforms would receive temporary federal funds to cover the cost of paying the associated benefits for several years, but there would be no ongoing cost to the federal government, because regular unemployment insurance benefits are fully state-funded.
-- Fiscal relief is also badly needed. Prior to the recession, states not only balanced their budgets every year but also had built up the largest budget reserves in recent history. (This refutes the claim by some that states' budget problems reflect fiscal mismanagement.) The recession has largely wiped out these reserves. Already 30 states have had to cut services ranging from health care to education, and more than a dozen have raised revenues.
As a result of the deepening recession, state deficits are likely to total $350 billion to $370 billion over the next 2 1/2 years. Without fiscal relief to close part of that gap, states will have to institute exceedingly deep budget cuts and tax and fee increases. Both kinds of measures reduce overall demand: tax increases leave consumers with less money to spend, and budget cuts reduce state payments to vendors, benefit recipients, and others, thereby taking money out of the economy. These measures would undercut the stimulus Washington is trying to provide.
-- Loans are no substitute for fiscal relief. A few policymakers support converting the fiscal relief to loans. This would render it ineffective as stimulus. Many states have legal barriers that explicitly prohibit them from borrowing funds to cover operating expenses. Even states that could accept the loans would be reluctant to do so, since they cannot know when their budgets will recover sufficiently to begin repaying the loans. In the last two recessions, most states' fiscal problems continued two to three years after the economy hit bottom.
Funds for infrastructure projects that can be undertaken in the next couple of years constitute effective stimulus, as well. Such infrastructure investments are appropriate measures to include in a recovery package.
The Center on Budget and Policy Priorities is a nonprofit, nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.
NOTES:
(1) Mark Zandi, "The Economic Impact of a $750 Billion Fiscal Stimulus Package," testimony before the House Democratic Steering and Policy Committee Forum, January 6, 2009.
(2) Congressional Budget Office, "Economic Stimulus: Evaluating Proposed Changes in Tax Policy," January 2002, http://www.cbo.gov/ftpdoc.cfm?index=3251&type=0.
(3) Congressional Budget Office, "Options for Responding to Short-Term Economic Weakness," January 2008, http://www.cbo.gov/ftpdocs/89xx/doc8916/01-15-Econ_Stimulus.pdf.
(4) GS Weekly, September 21, 2007.
(5) CBO, 2008.
(6) "State of the U.S. Economy and Implications for the Federal Budget," Hearing before the House Budget Committee, House of Representatives, December 5, 2007.
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Showing posts with label recovery package. Show all posts
Showing posts with label recovery package. Show all posts
Saturday, January 10, 2009
Thursday, January 8, 2009
Libertarians: We're Not Going to Spend Our Way to Economic Recovery
American's largest third party is calling plans by the incoming Obama administration a "multibillion-dollar boondoggle."
"We're not going to spend our way to economic recovery," says Andrew Davis, a spokesperson for the Libertarian Party. "You can't even call Obama's economic plans a gamble because the results are written in stone. We've tried this Keynesian experiment many times in the past, with no proven success. It's nothing but a multibillion-dollar boondoggle."
The Libertarian Party says that Obama's spending proposals, which include funding the largest public works program since the 1950s, will take too long to implement and don't pass a cost/benefit test.
"The best plan for economic recovery would be giving more money back to taxpayers in the form of tax cuts, which can increase consumer spending and increase job creation," says Davis. "It will also avoid the corruption and wastefulness of government spending—something that must be addressed at once if we expect to remain a free and prosperous nation."
"Public works projects, like those proposed by the Obama administration, will take too long to implement and many will cost far more than their economic benefit," Davis explains. "So, not only will the government be spending taxpayer money on wasteful projects, it be spending money during a time when economic relief is not needed. Conversely, tax cuts are always in season."
The Libertarian Party also warns that adding close to a trillion dollars in additional government spending to the budget will push the United States closer to financial ruin.
"Elected officials don't like to talk about the reality of government spending because it's not an issue that gets them reelected, especially when they will be long-gone before it comes time to pay the piper." says Davis. "However, we've reached an event horizon in spending that if government doesn't immediately begin to cut its programs, the only option will be massive tax increases unlike Americans have ever seen."
Davis says the government's focus should be on permanent and significant tax cuts. "However, any tax cuts absolutely have to be offset by a reduction in government spending, or else we're merely asking for higher taxes in the future," Davis explains. "We must not make the same mistakes of the Bush administration, which cut taxes, but also dramatically increased government spending."
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"We're not going to spend our way to economic recovery," says Andrew Davis, a spokesperson for the Libertarian Party. "You can't even call Obama's economic plans a gamble because the results are written in stone. We've tried this Keynesian experiment many times in the past, with no proven success. It's nothing but a multibillion-dollar boondoggle."
The Libertarian Party says that Obama's spending proposals, which include funding the largest public works program since the 1950s, will take too long to implement and don't pass a cost/benefit test.
"The best plan for economic recovery would be giving more money back to taxpayers in the form of tax cuts, which can increase consumer spending and increase job creation," says Davis. "It will also avoid the corruption and wastefulness of government spending—something that must be addressed at once if we expect to remain a free and prosperous nation."
"Public works projects, like those proposed by the Obama administration, will take too long to implement and many will cost far more than their economic benefit," Davis explains. "So, not only will the government be spending taxpayer money on wasteful projects, it be spending money during a time when economic relief is not needed. Conversely, tax cuts are always in season."
The Libertarian Party also warns that adding close to a trillion dollars in additional government spending to the budget will push the United States closer to financial ruin.
"Elected officials don't like to talk about the reality of government spending because it's not an issue that gets them reelected, especially when they will be long-gone before it comes time to pay the piper." says Davis. "However, we've reached an event horizon in spending that if government doesn't immediately begin to cut its programs, the only option will be massive tax increases unlike Americans have ever seen."
Davis says the government's focus should be on permanent and significant tax cuts. "However, any tax cuts absolutely have to be offset by a reduction in government spending, or else we're merely asking for higher taxes in the future," Davis explains. "We must not make the same mistakes of the Bush administration, which cut taxes, but also dramatically increased government spending."
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Without Large-Scale Recovery Package, Economy Could Shut Down, Economists Tell Lawmakers
/PRNewswire-USNewswire/ -- A large scale economic recovery package is needed to create jobs quickly, provide relief for workers and families, help states facing severe budget shortfalls, and invest in innovation and emerging industries, a bipartisan panel of economic experts and scientists told lawmakers on Capitol Hill January 7. Economists warned that, unless comprehensive action is taken, the economy will shed another 3 million jobs in 2009, real Gross Domestic Product could drop by $750 billion, and the unemployment rate will top 10 percent.
The Democratic Steering and Policy Committee, along with House committee chairs, convened the forum in the first days of the 111th Congress to brief lawmakers on the latest economic outlook and components that should be included in the upcoming economic recovery package.
"We must pass an economic recovery and jobs package no later than mid-February, in my view," said House Speaker Nancy Pelosi (D-CA). "This forum will demonstrate to the American public the need for this job and economic recovery package. We look forward working in the days ahead with our President-elect so we have legislation before we observe President's Day this year."
"Economists across the board agree that innovative strategies to create jobs and invest in our future are the only way to revive and grow our economy - and that workers and families can't afford to wait," said U.S. Rep. George Miller (D-CA), the co-chair of the Democratic Steering and Policy Committee and the chairman of the House Education and Labor Committee. "If we act swiftly and make wise decisions, we can tackle many challenges at once: rebuilding our economy and the middle class, improving our infrastructure and energy-independence, and regaining the competitive edge that will fuel discovery and opportunity for generations to come."
"We are holding this extraordinary hearing because of extraordinary times; indeed, we are convening as the economy falls deeper into crisis. We are shedding jobs at a staggering rate, retirement accounts are draining, the housing market has collapsed, the financial market is in turmoil, and the credit markets are nearly frozen. A crisis requires more than the band-aid of past efforts, but rather, we must act boldly to get our economy back to sustained job and income growth," said Congresswoman Rosa DeLauro (CT-3), the co-chair of the Democratic Steering and Policy Committee. "This forum today brought together a broad spectrum of economists and scientists who agree that we need to move quickly with a significant economic recovery package."
"This economy is shutting down," said Dr. Mark M. Zandi, the chief economist and cofounder of Moody's Economy.com, who predicted that the economy stands to lose 500,000 jobs a month for the foreseeable future. While both spending and tax cuts should be including in a package, spending provides a higher rate of return than tax cuts. Each dollar spent yields a return of $1.50 in economic growth; while each dollar in tax cuts yields $1 return.
"In my view, the goals of the economic recovery plan should be to strengthen traditional safety nets; increase purchasing power, especially among the bottom half; create as many new jobs as quickly as possible; get the long-term unemployed and the poor into many of those jobs," said Robert B. Reich, a Secretary of Labor under the Clinton administration and a professor at the University of California at Berkeley, who estimated that a stimulus of at least $900 billion over two years is needed. "The danger is not that the federal government will do too much but, rather, that it will do too little."
"While fixing the credit markets is necessary for sustained economic growth, it will not bring the economy back to full employment," explained Martin Feldstein, a professor of economics at Harvard University and the chief economic advisor to former President Ronald Reagan. "Because monetary policy is not effective, reviving the economy requires a major fiscal stimulus from tax cuts and increased government spending."
The panelists agreed that both immediate and long-term strategies are needed to jump-start the economy and spur long-term growth.
"We need to secure our overall competitiveness, otherwise we could create new jobs now only to lose them to foreign competition later," said Norman R. Augustine, the chair of National Academies' Rising Above the Gathering Storm report committee.
"What are most needed are elements that create real, sustained growth in the economy. We need to bolster existing high-growth innovation areas, and we will need to create new areas," said Maria T. Zuber, a professor of geophysics at the Massachusetts Institute of Technology. "One path ahead is clear: the country is at the cusp of a revolution in energy science and technology."
Overall, the panel's recommendations included:
-- Providing aid to states and local governments to maintain jobs and
vital aid programs;
-- Expanding unemployment insurance and extending jobless benefits;
-- Investing in existing, shovel-ready infrastructure projects, including
highways, roads, bridges, schools, levees, water and sewage systems,
and the electricity grid to get Americans back to work quickly and
effectively;
-- Investing in science, technology and other emerging industries to
support research and drive innovation and sustainable growth;
-- Creating a green economy by investing in energy-independence and
building a "green" jobs corps;
-- Providing tax cuts for lower- and middle-income families to increase
purchasing power;
-- Improving job training programs and support for unemployed and lower-
workers; and
-- Ensuring that economic recovery package is transparent and accountable
to the American public.
The forum built on committee hearings held during the 110th Congress to examine the need for an economic stimulus plan. The chairs of those committees, including the chairmen of the Science and Technology, Budget, Energy and Commerce, Ways and Means, Education and Labor, Appropriations and Transportation and Infrastructure Committees, all participated in today's forum.
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The Democratic Steering and Policy Committee, along with House committee chairs, convened the forum in the first days of the 111th Congress to brief lawmakers on the latest economic outlook and components that should be included in the upcoming economic recovery package.
"We must pass an economic recovery and jobs package no later than mid-February, in my view," said House Speaker Nancy Pelosi (D-CA). "This forum will demonstrate to the American public the need for this job and economic recovery package. We look forward working in the days ahead with our President-elect so we have legislation before we observe President's Day this year."
"Economists across the board agree that innovative strategies to create jobs and invest in our future are the only way to revive and grow our economy - and that workers and families can't afford to wait," said U.S. Rep. George Miller (D-CA), the co-chair of the Democratic Steering and Policy Committee and the chairman of the House Education and Labor Committee. "If we act swiftly and make wise decisions, we can tackle many challenges at once: rebuilding our economy and the middle class, improving our infrastructure and energy-independence, and regaining the competitive edge that will fuel discovery and opportunity for generations to come."
"We are holding this extraordinary hearing because of extraordinary times; indeed, we are convening as the economy falls deeper into crisis. We are shedding jobs at a staggering rate, retirement accounts are draining, the housing market has collapsed, the financial market is in turmoil, and the credit markets are nearly frozen. A crisis requires more than the band-aid of past efforts, but rather, we must act boldly to get our economy back to sustained job and income growth," said Congresswoman Rosa DeLauro (CT-3), the co-chair of the Democratic Steering and Policy Committee. "This forum today brought together a broad spectrum of economists and scientists who agree that we need to move quickly with a significant economic recovery package."
"This economy is shutting down," said Dr. Mark M. Zandi, the chief economist and cofounder of Moody's Economy.com, who predicted that the economy stands to lose 500,000 jobs a month for the foreseeable future. While both spending and tax cuts should be including in a package, spending provides a higher rate of return than tax cuts. Each dollar spent yields a return of $1.50 in economic growth; while each dollar in tax cuts yields $1 return.
"In my view, the goals of the economic recovery plan should be to strengthen traditional safety nets; increase purchasing power, especially among the bottom half; create as many new jobs as quickly as possible; get the long-term unemployed and the poor into many of those jobs," said Robert B. Reich, a Secretary of Labor under the Clinton administration and a professor at the University of California at Berkeley, who estimated that a stimulus of at least $900 billion over two years is needed. "The danger is not that the federal government will do too much but, rather, that it will do too little."
"While fixing the credit markets is necessary for sustained economic growth, it will not bring the economy back to full employment," explained Martin Feldstein, a professor of economics at Harvard University and the chief economic advisor to former President Ronald Reagan. "Because monetary policy is not effective, reviving the economy requires a major fiscal stimulus from tax cuts and increased government spending."
The panelists agreed that both immediate and long-term strategies are needed to jump-start the economy and spur long-term growth.
"We need to secure our overall competitiveness, otherwise we could create new jobs now only to lose them to foreign competition later," said Norman R. Augustine, the chair of National Academies' Rising Above the Gathering Storm report committee.
"What are most needed are elements that create real, sustained growth in the economy. We need to bolster existing high-growth innovation areas, and we will need to create new areas," said Maria T. Zuber, a professor of geophysics at the Massachusetts Institute of Technology. "One path ahead is clear: the country is at the cusp of a revolution in energy science and technology."
Overall, the panel's recommendations included:
-- Providing aid to states and local governments to maintain jobs and
vital aid programs;
-- Expanding unemployment insurance and extending jobless benefits;
-- Investing in existing, shovel-ready infrastructure projects, including
highways, roads, bridges, schools, levees, water and sewage systems,
and the electricity grid to get Americans back to work quickly and
effectively;
-- Investing in science, technology and other emerging industries to
support research and drive innovation and sustainable growth;
-- Creating a green economy by investing in energy-independence and
building a "green" jobs corps;
-- Providing tax cuts for lower- and middle-income families to increase
purchasing power;
-- Improving job training programs and support for unemployed and lower-
workers; and
-- Ensuring that economic recovery package is transparent and accountable
to the American public.
The forum built on committee hearings held during the 110th Congress to examine the need for an economic stimulus plan. The chairs of those committees, including the chairmen of the Science and Technology, Budget, Energy and Commerce, Ways and Means, Education and Labor, Appropriations and Transportation and Infrastructure Committees, all participated in today's forum.
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