MONEY AND WORK

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January 9, 2009

OBAMA STIMULUS WILL LEAVE ECONOMY FLACCID

NY Times - President-elect Barack Obama's economic recovery plan ran into crossfire from his own party in Congress, suggesting that quick passage of spending programs and tax cuts could require more time and negotiation than Democrats once hoped. Senate Democrats complained that major components of his plan were not bold enough and urged more focus on creating jobs and rebuilding the nation's energy infrastructure rather than cutting taxes. . .

Further complicating the picture, Democratic senators said that they would try to attach legislation to the package that would allow bankruptcy courts to modify home loans, a move Republicans have opposed. . .

While conservatives criticize the high spending, and moderate Democrats express concern about the swelling deficit, liberals are pushing for even more money devoted to social programs, alternative-energy development and road, bridge and school construction. . .

"There is only one thing we have got to do in the stimulus, and that is how can we create jobs," said Senator Tom Harkin, Democrat of Iowa, as he left the meeting. . .
Senator Kent Conrad, Democrat of North Dakota and chairman of the Budget Committee, said lawmakers and the incoming administration had differences over how to focus the huge federal spending in a recovery bill. "Investment, investment, investment has got to be the central focus: energy, roads, bridges, waterways, housing," he said. "Job creation is job one."

Mr. Conrad, who described the meeting as extremely positive, said Mr. Summers ended it by telling the senators, "Message received, loud and clear."
Several Democrats on the Finance Committee earlier in the day questioned the proposal to give tax credits worth $500 to individuals and $1,000 to married couples. Several senators said that initiative would provide a token sum of money, which taxpayers were likely to save, not spend.

Senator John F. Kerry, Democrat of Massachusetts, and others also criticized a proposal to give businesses a $3,000 tax credit for each new employee they hire, saying it was unlikely to influence business decisions.. . .

Some Democrats said they were not sure that Congress and the Obama administration would ultimately see eye to eye. Mr. Harkin pointed to Mr. Obama's speech earlier in the day to promote the economic recovery package and said the rhetoric did not match the dollars in the plan.

Paul Krugman, NY Times - Mr. Obama's prescription doesn't live up to his diagnosis. The economic plan he's offering isn't as strong as his language about the economic threat. In fact, it falls well short of what's needed.

Bear in mind just how big the U.S. economy is. Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it's able to sell. And the Obama plan is nowhere near big enough to fill this "output gap."

Even the [Congressional Budget Office] says that "economic output over the next two years will average 6.8 percent below its potential." This translates into $2.1 trillion of lost production.

To close a gap of more than $2 trillion - possibly a lot more, if the budget office projections turn out to be too optimistic - Mr. Obama offers a $775 billion plan. And that's not enough.

Now, fiscal stimulus can sometimes have a "multiplier" effect: In addition to the direct effects of, say, investment in infrastructure on demand, there can be a further indirect effect as higher incomes lead to higher consumer spending. Standard estimates suggest that a dollar of public spending raises G.D.P. by around $1.50.
But only about 60 percent of the Obama plan consists of public spending. The rest consists of tax cuts - and many economists are skeptical about how much these tax cuts, especially the tax breaks for business, will actually do to boost spending. . . Howard Gleckman of the nonpartisan Tax Policy Center summed it up in the title of a recent blog posting: "lots of buck, not much bang."

The bottom line is that the Obama plan is unlikely to close more than half of the looming output gap, and could easily end up doing less than a third of the job. . .
There are dangers associated with large-scale government borrowing - and this week's C.B.O. report projected a $1.2 trillion deficit for this year. But it would be even more dangerous to fall short in rescuing the economy. . .

Is the plan being limited by a lack of spending opportunities? There are only a limited number of "shovel-ready" public investment projects - that is, projects that can be started quickly enough to help the economy in the near term. But there are other forms of public spending, especially on health care, that could do good while aiding the economy in its hour of need.

Or is the plan being limited by political caution? Press reports last month indicated that Obama aides were anxious to keep the final price tag on the plan below the politically sensitive trillion-dollar mark. There also have been suggestions that the plan's inclusion of large business tax cuts, which add to its cost but will do little for the economy, is an attempt to win Republican votes in Congress.

Whatever the explanation, the Obama plan just doesn't look adequate to the economy's need.

Jesse Drucker, Wall Street Journal - The main business tax cuts proposed by President-elect Barack Obama are likely to be a windfall for two industries particularly tied to the current economic meltdown: Wall Street investment banks and home builders.

Under the proposal being crafted by the incoming Obama administration and congressional Democrats, companies would be able to use their so-called tax losses to offset taxable U.S. profits earned in the past five years.

Typically, companies can carry back such losses only two years. The Obama proposals likely would mean that companies with enormous losses from last year and this year could use the losses to help wipe out tax obligations from the previous five years and receive sizable tax-refund checks from the Treasury Department. For some firms, that would mean cash payments of billions of dollars.

Elean Schor, TPM - "There's only one thing we've got to do in this stimulus, and that's create jobs," Harkin told me. "I'm a little concerned by the way Mr. Summers and others are going on this . . . it still looks a little more to me like trickle-down.". . . Likening Barack Obama's economic recovery plan to the failed supply-side excesses of the Reagan and Bush years is a bit of a Cassandra moment. But Harkin didn't back down. "What I'm hearing from Mr. Summers is that they've got a different approach -- tax breaks, and this and that," he said. Harkin warned that, much like the outcome of George Bush's $600 stimulus package last year, recipients of quick tax cuts "are going

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