Not enough stimulus in the stimulus package?

Obama and Congressional leaders: not a happy group

Following President Obama's meeting today with Republican Congressional leaders about his proposed stimulus package, Obama is still seeking Republican support, but he and House Speaker Nancy Pelosi restated their commitment to move forward with the plan. Pelosi said it could be passed by the House as early as next Wednesday.

The plan is sure to encounter more opposition in the Senate, where the Republican Minority has more clout, and not all Democrats are committed to the Obama-House proposals.

Obama, Pelosi and Senate Majority Leader Harry Reid could probably manage to ram through most of the current package with a few modifications to placate moderate Senate Democrats and attract a few Republicans. In this first and arguably most important act of his Administration, however, Obama wants more than marginal GOP support. An sizable bi-partisan vote in both Houses would be a major victory for him and his politics of "post-partisanship," and would ensure that the GOP shares ownership in, and political responsibility for, the results, whatever they may be down the road.

The big sticking point is how much of the plan is really fiscal stimulus to shore up the economy, spur renewed growth and create jobs and how much may be spent too late or in ways that are not all that stimulating.

According to a leaked report by the non-partisan Congressional Budget Office, "Less than half the money dedicated to highways, school construction and other infrastructure projects in a massive economic stimulus package unveiled by House Democrats is likely to be spent within the next two years...meaning most of the spending would come too late to lift the nation out of recession."

The report "found that only about $136 billion of the $355 billion that House leaders want to allocate to infrastructure and other so-called discretionary programs would be spent by October 1, 2010. The rest would come in future years, long after the CBO and other economists predict the recession will have ended." The CBO also projected that only $26 billion of the total infrastructure and discretionary funds would be spent by the end of the current fiscal year.

But the CBO analysis applied to less than half of the $825 billion package hammered out by the Obama White House and House Democrats. That proposal also includes $275 billion in tax cuts and nearly $200 billion for jobless benefits, food stamps and other entitlement programs. These funds would be injected into the economy more quickly than the infrastructure spending. The White House today stood firmly behind the plan, noting that 75 percent of the total amount "will be spent in the next 18 months to create jobs and to get people working and to get the economy moving again."

In any case, the CBO report has given a boost to the Republicans' argument that a significant part of the House package consists of programs that have little to do with fiscal stimulus and much to do with other Democratic agendas.

This debate recalls the reasons why many mainstream economists began as early as the 1960s to downplay fiscal policy, as opposed to monetary policy, as an effective tool of government to infuence the business cycle. It was thought that by the time Congress realized a downturn was in progress, legislated, and money actually began to circulate in the economy, it would probably be too late to have the desired salutary impact.

In addition to the issue of speed, it's important to remember that fiscal policy has two dimensions: first, the federal government must run a deficit, in effect printing money to expand the money supply; and second, to gain the most advantage, it should target its spending to activities that will maximize the multiplier effects of the newly printed money in circulation.

The House plan does a good job of printing money, but it's not clear how well the spending has been targeted or how quickly it will make an impact.

Here's my suggestion: divide the package into two parts. The first $500 billion or so should include all the spending that can be implemented with effect quickly -- the tax cuts, expanded job benefits, aid to states, and truly "shovel ready" infrastructure. Pass that part right away -- maybe even before mid-February -- with substantial GOP support. The second part of about $250 or $300 billion, including all the rest, can be taken up as soon as the first part is approved. The Democrats will still have the majorities they need to pass the whole thing, but at least we'll know which batch of spending is supposed to do what.