A number of the comments to this question have stressed conventional stimulus approaches focused on shoring up consumer spending.  These include traditional measures such extended UI coverage, aid to the states, and tax rebates for individuals, as well as some newer ideas like sales tax rebates.  But in the desire to spur economic activity in the near term, there is a risk that the stimulus package will give short shrift to needed investments that could not only spur jobs in 2009 but also have significant long term benefits for the nation.  As a result, it is critical that Congress pass a balanced stimulus package of which a not insignificant portion supports investment, rather than simply consumption.

One target that John Irons rightly focuses on is physical infrastructure.  Currently there is an annual shortfall in surface transportation infrastructure investment (roads and transit) of around $100 billion a year to maintain and improve system performance.   Devoting significant funding to surface transportation infrastructure, particularly to “shovel ready” projects (maintenance and new construction), would not only spur investment and jobs in the short run, but also improve mobility and productivity over the moderate and long run.

But we need to not just invest in 20th century infrastructure, but also in 21st century digital infrastructure.  In particular, three key digital networks – health IT, green grid, and broadband – show particular promise.  Investment in health IT, particularly in electronic health records, is necessary to improve quality of care and help stem the rising cost of health care.  Investment in two-way communication, sensors, and advanced IT for the electric grid infrastructure will create an intelligent and connected power grid—the “smart grid”—leading to significant increases in energy efficiency and new energy innovations.  And finally, investments in high-speed broadband Internet access can spur access to information and important services, such as education, health care, and access to work through telecommuting.

As ITIF will document in a forthcoming report, spurring investing in these IT infrastructures offers superior job creation benefits, in part because it creates not just an indirect and induced jobs multiplier, but also a “network multiplier.”  This additional multiplier arises from new consumer and business behaviors, functionalities, and downstream industries enabled by the new or expanded IT infrastructure.   When a network like broadband, health IT or green grid is not yet fully built out and not yet fully mature in its technology the network’s growth produces higher externality gains.  For example, building the smart grid will spur a host of innovative new products and services from hybrid plug-in electric vehicles to smart appliances to more investment in renewable energy.

IT-based infrastructure projects not only provide strong job creation opportunities in the near term, they spur long-term economic growth.  Most economists now agree that IT has been central to economic growth over the last decade, and advancing further digital transformation will be critical to boosting growth going forward.  Moreover, these digital infrastructures can help solve key pressing national challenges, including reducing greenhouse gas emissions, improving education, and reducing health care costs.

It will not be enough to include sizeable support for these investments in the stimulus bill.  Any incentives will also have to be designed to stimulate the largest amount of investment in the short term.  Unfortunately, some advocates have sought to use stimulus measures to achieve other, conflicting goals.  For example, Free Press, a DC-based media advocacy organization, has proposed an array of broadband stimulus measures.  However, many are designed in ways not to get as much broadband as possible built in the short run, but to advance their own agenda of getting "open" networks and even greater rates of broadband competition.  By structuring incentives in a way that only new startups are likely to qualify or with so many restrictions that existing companies will be unlikely to take advantage of them is to ensure that there will be little broadband investment and few jobs as a result. 

If incentives – whether tax incentives or grants – are to get as much digital infrastructure built in the short term, they need to be structured in ways that are relatively straightforward and easy to use by companies or organizations.  For example, providing a 40 percent tax credit for costs of investments made by doctors in “fully functional” electronic health record systems coupled with grants for non-profit health care providers would go a long way to getting us to a “tipping point” for health IT.  Likewise, providing tax credits to any broadband providers (new entrants and incumbent) for expanding networks to unserved areas and upgrading the speeds of existing networks can help spur a significant amount of broadband investment. 

The stimulus package presents a once in a generation opportunity to modernize and upgrade our nation's digital infrastructure, but only if the incentives are generous and designed in ways that are easy to take advantage of by the companies and other organizations that will be doing most of the investing.  

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Previous comments have noted the need for extended unemployment benefits, an increase in food stamp benefits, and aid to states to prevent cuts. These are all sensible provisions that should be included. As Simon Johnson noted though, the total value of this stimulus—with $50 billion for states-would be on the order of $60-70 billion. Unfortunately, we will need significantly more to avert the worst of the crisis. A recovery package that includes these measures plus an additional $75 billion in investments in infrastructure would begin to reach an adequate size.

Investments in roads/bridges, schools, and wastewater systems could go a long way towards creating jobs while filling national needs.

The common critique of this kind of investment as an economic stimulus is that infrastructure projects have substantial lag times between the authorization of infrastructure spending and actual outlays (that “the fire’s out by the time the water gets to the hose”). Historically only 27% of federal highway funds are spent within a year of authorization, with 69% spent in the first two years (Buechner 2002). However, there are plenty of examples where the work can begin quickly if there is the will. For example, the replacement of the I-35 bridge in Minneapolis was completed just over one year after the original bridge collapsed last August.

To speed the economic impact, the infrastructure investments should focus on maintenance projects—which can be begun and completed faster than new construction—and “ready to go” projects, which have already gone through most of the preliminary stages and are close to construction. Many of these projects have been delayed midway through the process due to lack of funding and would be able to restart immediately if federal funding were made available. For example, the American Association of State Highway and Transit Officials estimates there are 3,000 “ready to go” transportation projects totaling $18 billion, while the National Association of Clean Water Agencies estimates $4 billion in “ready to go” wastewater treatment projects. These projects could all begin construction within 90 days of legislative enactment. Additionally, school repair and maintenance projects could spend $10 billion over the summer months, while construction of new school buildings could begin immediately in hundreds of school districts around the country.

This critique is also less relevant in light of recent experience with recessions. In the last two recessions, job loss and labor market stagnation persisted well after the “official” end of the recession. In the 1990-1991 recessions, it took over 2 1/2 years for employment to return to pre-recession levels, and in 2001, it took 4 years. Finding projects that will lead to quick and sustained job creation should be seen as a virtue, not a vice.

Finally, because we have an infrastructure maintenance backlog, many of these expenditures are needed anyway. By accelerating federal funding, we are able to fund national priorities while simultaneously creating jobs.

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As we head into what will almost certainly be the worst recession since the early 1980s, if not the 1930s, there is a near-consensus that some form of economic stimulus is appropriate. The key questions now are how much, and in what form.

Before deciding these specific questions, however, we need to define the general objectives of the stimulus. The global economy is headed for deep trouble (see http://BaselineScenario.com for the latest developments). The US economy is going through a massive de-leveraging process that is causing significant declines in asset values - first in real estate markets, now in securities markets - that will reduce the purchasing power of consumers for years to come. Attempting to prop up those asset values by putting more money in people's pockets is likely to fail - the amount of money needed would be huge - and would likely only extend the de-leveraging process. The experience of the stimulus package earlier this year was that a large proportion of the tax rebates went toward household savings or paying down debt; asking the American consumer to spend his or her way out of this recession is unlikely to succeed.

So what are we trying to achieve? I think there are three main objectives:
1. Reduce the depth and severity of the recession. The constriction in lending and widespread pessimism among both consumers and businesses risk producing a sharp downturn that pushes asset values far below their sustainable levels. A classic economic stimulus, by encouraging economic activity, can counteract this pessimism and limit the damage. One condition of meeting this objective is that measures should be designed to flow into the economy quickly.
2. Help those people who will be hurt most by the recession. One can argue that this is not, strictly speaking, necessary to economic recovery, I believe it remains an obligation of our government and society to limit the human misery that will be caused by a recession.
3. Invest in America's long-term growth and productivity. The stimulus plan should encourage behavior that will increase the long-term economic prospects for the country. A simplistic way of putting this is that given the choice, we would rather see investments in infrastructure than in consumption of flat-screen TVs.

Another factor we need to keep in mind is that this is likely to be a relatively long recession, where economic growth may not return to medium-term levels for 18 months or longer. In this context, stimulus measures that might not be considered for a shorter recession should be put on the table.

So, with these considerations in mind, what should the stimulus package include?

Like two of the previous commenters, I favor direct aid to state and local governments, extended unemployment benefits, and food stamps. Aid to state and local governments is a no-brainer for two reasons. First, because it replaces money that state and local governments have been forced to cut from their budgets, it can have a very rapid effect, without the need to design new programs. Second, the money will go to programs that these governments have already decided are important and worth funding, minimizing the risk that the stimulus will be wasted on inappropriate ends.

Extended unemployment benefits and increased food stamp aid meet the first two of the three objectives listed below. They have a high "bang for buck" ratio, because needy people are more likely to spend each incremental dollar, and they help some of the people who will be most sorely affected by the economic downturn.

To these ideas I would add money for relief to distressed homeowners in the form of government-sponsored loan modifications (I realize that this may not be in the fiscal stimulus package per se, but it should not be far behind). The current proposal to guarantee modified loans is promising. Like any guarantee, however, it raises the possibility that the government may lose money. This would be an appropriate usage of money as part of the stimulus package, as this program should help prevent housing prices from crashing far below their long-term values, and therefore prevent a further depletion of households' spending power.

In addition, however, a number of other stimulus programs should be considered, for two reasons. First, the numbers that Robert Greenstein is talking about below - $50 billion for state and local government aid, $6.5 billion for unemployment benefits, $5-12 billion for food stamps - are likely to be too small to have much of an impact. Put another way, we can add a lot more before we come close to any risk of overheating the economy. Second, the expected length and depth of this recession provide an unusual opportunity: an opportunity to invest in our economic future while also combating the recession.

For these reasons, the following initiatives should also be on the table:
1. Investment in basic infrastructure, such as highways and bridges. In order to accelerate the economic impact, money could initially be put into maintenance projects, but new construction projects should not be ruled out.
2. Job retraining programs or grants. The recession will accelerate some of the long-term changes in the American economy; the proposed merger of GM and Chrysler is just one sign of this trend. Tens of thousands of people will need to develop new skills.
3. Expanded student loans. Even before the latest phase of the financial crisis, smaller lenders were exiting the student loan market, especially for community college students, and there is a risk that this trend could reduce the availability of college educations for lower-income students. Student loans will go directly toward paying for tuition and other costs, so they should have a direct impact on the economy.
4. Expanded small business loans. The credit crisis has not only seen a reduction in the availability of credit, but also an increase in the price of credit for small businesses. Government programs to guarantee small business loans or otherwise increase the availability of credit should have a nearly-direct impact on the economy. The programs could be designed to discourage companies from getting new loans to pay down existing loans.
5. Investment in alternative energy, through tax incentives, direct grants, or other means. Someday in the next couple years the price of oil will start increasing again; despite its recent fall, long-term projections of the amount of oil in the world have not changed. Moving our economy away off of oil and onto alternative energy sources will not only protect us from inflation in the future, but will give our companies a new avenue for long-term growth.

There remains the question of how big the stimulus package should be. Martin Baily, in his testimony a few days ago, discussed a range of $150 billion to $300 billion, or roughly 1 to 2 percent of GDP. The truth is that no one has a good idea of how severe the recession will be, and that at every point in the current crisis policy makers and economists have underestimated how severe the next stage would be.

The response to the recent crisis of confidence in the credit markets was too incremental and too slow, and it was not until the G7 unleashed coordinated bank recapitalizations and loan guarantees that the panic started to ease. Given the extreme level of pessimism that weighs on the real economy, it would be a mistake not to use the appropriate level of fiscal force. Therefore, I would recommend the upper end of Martin Baily’s proposed range.

Of course, there is much more to be done, particularly in terms of monetary policy. These issues we take up further this week on http://BaselineScenario.com.

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At present, the downside risks to the US economy could hardly be more threatening. Over the past year, falling housing, equity, and bond prices have reduced household wealth by over 80 percentage points of GDP and there is every indication that asset price deflation will continue in the period ahead. At the same time, the vicious process of bank de-leveraging that has been all too evident in recent months has now spread to the unregulated hedge fund industry. Bank credit is now contracting at its fastest pace in the post-war period while credit spreads have widened to highly onerous levels for corporate and household borrowers.

A deep US recession now appears to be unavoidable over the next two quarters. If this recession is not to morph into something far more serious, it is of the essence that a fiscal stimulus package be quickly introduced of at least the US$300 billion to US$500 billion size now being recommended by Goldman Sachs. However, it is important that a fiscal stimulus of even that size not be viewed as the silver bullet that might turn the very troubled US economy around. Rather, any fiscal package must be accompanied by further monetary loosening and by bold and unorthodox measures to stabilize the housing market and to arrest the alarming spike in foreclosures that has been a primary factor underlying the credit crisis.

In designing a fiscal policy package, overriding consideration should be given to those measures that are fast acting and to those that get the most bang for the buck. Such consideration would favor aid to state and local governments, direct help to displaced workers, and tax cuts as well as other benefits for households with high spending propensities. While infrastructure spending would also appear desirable, one should be mindful of the long lags involved in getting such spending to have an effect on an economy that now seems to be in a downward spiral

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While on conservative talker Glenn Beck's radio show 10/21, Sarah Palin was asked "Are you for this new stimulus package?"

Palin replied: "There's some points in it that make sense, some provisions in there that make sense, but how far are we going to go here in asking taxpayers to bail out even further, I guess entities, individuals, those who have made some poor decisions and then being able to kind of sit back and rely on others to prop them up and bail them out. This next one of the Democrats being proposed should be very, very concerning to all Americans because to me it sends a message that $700 billion bailout, maybe that was just the tip of the iceberg. No, you know, we were told when we've got to be believing if we have enough elected officials who are going to be standing strong on fiscal conservative principles and free enterprise and we have to believe that there are enough of those elected officials to say, no, okay, that's enough. We can use what we've already seen approved by congress and better use those funds even than how it's been laid out via the priorities that some in congress want to see the $700 billion spent. But when is enough enough"
-- via Hotline.

The three fiscal policy measures listed below constitute a good starting point for a new stimulus package. All are likely to be highly effective as stimulus because they concentrate relief on those most likely to spend the money quickly, thereby pumping dollars into an economy that needs more demand:

1. Extended unemployment insurance benefits.  Earlier this year Congress provided 13 weeks of additional jobless benefits to workers who have been unable to find work.  But many workers began exhausting those benefits earlier this month, and with labor market conditions deteriorating in many states, large numbers of workers won’t be able to find work before their benefits run out.  The National Employment Law Project estimates that 1.1 million unemployed workers will lose benefits between October and December, unless Congress acts.
   
   The stimulus legislation Congress considered last month would have provided jobless workers with seven additional weeks of benefits — or 20 additional weeks of benefits if their state’s unemployment rate is at least 6 percent.  This would cost $6.5 billion.  Congress should include such a provision in a new stimulus package, and should also consider other measures to strengthen the unemployment insurance system.
    
2. A temporary increase in food stamp benefits.  The economic slowdown has coincided with a sharp increase in food prices.  Food stamp benefits are supposed to enable low-income households to afford a low-cost but nutritionally adequate diet, but benefits through the end of fiscal year 2009 are tied to food prices back in June 2008 and already are inadequate to purchase that low-cost diet, as a recent Center analysis explains.
   
   Therefore, Congress should temporarily increase the food stamp benefit standard by some percentage, such as 10 to 15 percent.  Depending on the precise percentage and how long the increase would remain in effect, this would cost $5 to $12 billion.  Such a temporary increase would help millions of low-income households purchase a basic diet throughout the coming fiscal year.  It would also significantly boost the economy:  economists have ranked a temporary food stamp increase as one of the fastest, most effective forms of economic stimulus.  USDA estimates that a $5 billion temporary increase in food stamp benefits would result in $8.2 to $9.2 billion in economic stimulus.
    
3. Fiscal relief to help states avert budget cuts and tax increases that would further weaken the economy.  States are likely to face about $100 billion in budget shortfalls next fiscal year (which starts July 1 in most states), largely because of falling revenues resulting from the slumping economy.  Unlike the federal government, states are required to balance their budgets even during recessions.  As a result, without federal assistance, they’ll be forced to enact large spending cuts and/or tax increases to balance their budgets — both of which will further weaken an already slow economy by reducing overall demand.
   
   As Iris Lav, the Center’s Deputy Director, told the House Budget Committee this week, Congress can minimize these harmful actions by providing relief equal to about half of the expected state shortfalls, or approximately $50 billion.  Most of this amount ($30 billion to $35 billion) should consist of an increase in the federal share of Medicaid costs to limit the increase in the number of uninsured Americans during the downturn.  The rest of the fiscal relief could go in a broad block grant to states to help them prevent state cuts to education, other critical programs, and aid to localities.

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Laurence J. Kotlikoff

Edward Leamer

Running a National Sale

The demise of financial titans and the incessant warnings of economic Armageddon have unleashed a tidal wave of asset sales across the globe, eviscerating trillions in personal wealth. Stock prices are now low enough to bring back some buyers, but the contest between fear and greed remains undecided.

The same defensive mentality that allowed the sale of equities at fire sale prices threatens to cause a sharp drop in consumer spending, which accounts for 72 percent of U.S. GDP. If this happens, the economy will slide into deep recession.

We need to put a halt to self-fulfilling prophecies of doom. The key is realizing that recessions are usually consumer cycles, not business cycles. They’re driven by weakening demand first for homes, then for consumer durables, and finally for nondurables and services. As consumers stop spending, businesses stop investing, and the economy “recedes”.

The $700 billion “bailout/buyup/inject” bill and other Treasury and Fed actions will shore up the banks and provide credit. Yet credit is only part of the equation. Most consumer spending is not financed from borrowed money, but from the money we earn and the money we’ve saved. But our instinct now is to hoard every dollar for fear it’s our last. If we all do this, firms will find no customers to whom to sell their wares. Thus, collective and obsessive attempts to save can undermine the economy, leaving us with less output and, ultimately, less saving. This is Keynes’ Paradox of Thrift.

To escape the panicked-saving trap, we need to immediately and directly stimulate consumption. Having Uncle Sam send us checks won’t work. Some eighty cents of every dollar of the stimulus checks we received last Spring appears to have been saved, not consumed. The rather small personal income tax cuts advocated by Senators McCain and Obama would likely elicit a similar response. And Senator Obama’s proposed employment tax credit will work only if employers know they’ll have customers.

Another option is for Uncle Sam to distribute gift certificates in the form of debit cards that expire, say, in six months. But, as we saw post-Katrina, distributing these cards takes time and invites fraud.

A better way to spur consumer spending is for Uncle Sam to run a six-month national sale by having a) state governments suspend their sales taxes and b) the federal government make up the lost state sales revenues. The national sale could be implemented immediately.

Here’s how it would work. Uncle Sam would pay each state a fixed percentage – say 5 percent -- of the 2007 consumption of its residents. States would be required to reduce their retail sales tax rates by enough to generate a six-month revenue loss (calculated using 2007 data) equal to the amount they’ll receive from Uncle Sam.

For states with low or zero sales tax rates, implementing this policy requires making their sales tax rates negative, i.e., subsidizing purchases. Shoppers would see a negative tax on their sales receipts, lowering their outlays. State governments would reimburse businesses for paying the subsidy and, in turn, be reimbursed by the Feds.

States would be free to broaden their sales tax bases to apply the National Sale to all retail sales, not just the sales currently covered in their sales tax systems. To make the policy progressive, states could also reduce sales tax rates by more for goods and services that are disproportionately consumed by the poor.

Would some retailers try to cheat the system and request reimbursement for subsidies they didn’t actually make? Yes. But stiff penalties and vigorous enforcement should make this a minor problem.

How big should this stimulus be? A 5 percent national sale extending for six months would cost the Treasury about $250 billion. Can the government afford this? Yes, the cumulated lost production from a deep recession is on the order of 10 percent of GDP – roughly $1.4 trillion, and the associated loss to Uncle Sam in tax receipts and extra transfer payments could easily exceed $300 billion. It’s unlikely that a national sale will prevent a recession. But it should shorten it and reduce its severity. Hence, we suspect that Uncle Sam would quickly recoup much of his costs in running the national sale.

No plan is perfect, and this one has its flaws and risks. But it will apply economic medicine where it’s most needed – on consumer spending, giving everyone an incentive to spend now and begin again to trust our economy and its institutions.

(Laurence J. Kotlikoff is a Professor of Economics at Boston University and co-author of Spend ‘Til the End. Edward Leamer a Professor of Economics at UCLA’s Anderson School of Management and Director of the UCLA Anderson Forecast.)

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One goal of a sensible stimulus package is to provide protection to Americans who are economically vulnerable and will face elevated risks as a result of a downturn. The first group that comes to mind is the newly unemployed. A recession boosts the number of workers placed on layoff, and at the same time it increases the expected duration of unemployment spells. Because job openings will become more scarce relative to the number of job seekers, laid off workers will have to look harder and longer for their next jobs. For this reason, any serious stimulus package must include a federally funded extension of unemployment benefits.

Last summer Congress funded a 13-week extension of standard unemployment insurance (UI). In most states, the standard UI package lasts about 26 weeks, so the extension currently makes it possible for unemployed workers to draw up to 39 weeks of benefits. It would be sensible to continue this benefit extension and to fund a further 7-week extension for unemployed workers who live in states which have an above-average unemployment rate. In addition, there are many laid-off workers who are not eligible to draw unemployment benefits under current state UI rules. Congress should authorize special federally funded unemployment benefits to these workers under temporary and relaxed eligibility rules. Many workers who have short-term or part-time jobs do not earn high enough wages in the 12 months leading up to their layoff to qualify for standard UI benefits. Before welfare reform in 1996, unemployed workers who had child dependents might have applied for and received AFDC benefits to tide them over until they found another job. Tougher welfare eligibility rules now make it much harder for unemployed parents to collect welfare. A temporary UI program with relaxed eligibility rules would offer help to this vulnerable population.

I also see a powerful argument for higher food stamp benefits. Recall that these benefits are targeted on families with little income and few assets. They can only be used to pay for food, and food prices have risen faster than most other prices. In the 12 months ending in September 2008, food prices rose 6.0% whereas prices aside from food and energy only increased 2.5%. Most observers agree that basic food stamp allotments have not kept pace with increases in food prices, so some boost in basic benefits would be justified even in the absence of a recession. The onset of a recession makes the case for an increase more compelling.

Finally, most analysts think it would be a sound idea to help state governments maintain their spending in a downturn. In contrast to the federal government, which can and does borrow freely in recessions, state and local governments are constrained in the amount of regular spending they can finance through borrowing. Under state constitutions, most state governments must trim spending when tax revenues decline, even though their residents’ need for government help may be growing. When hundreds of thousands of workers are losing employer-provided health insurance as a result of layoffs, it does not make sense for states to scale back publicly funded health insurance for needy residents. Yet that is precisely what many states will do when their revenues plunge and their deficits grow. The easiest way for the federal government to reduce pressures on state budgets in the near term is to increase matching grants for programs that provide help to states’ needy citizens. A simple way to achieve this is to increase the federal matching rate for state medicaid programs. The federal government currently pays for 50% to 80% of state medicaid costs, with higher matching rates for the poorest states. (The matching grant formula is tied to the average income level in each state.) To provide short-term help to states it would be straightforward to boost current matching rates to reflect the level of state unemployment. States with the highest average unemployment rates would receive the biggest increase in federal matching funds.

All of these suggestions involve relatively straightforward – and temporary – changes in existing programs. All are aimed at protecting a vulnerable population or one that can be expected to incur sizeable losses in a recession. And all the proposals can be implemented quickly.

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