Obama's fiscal plan

Obama's speech this morning said nothing really new about what he intends. Earlier this week he said he was looking at proposals that would inject $800 billion or more into the economy over two years, a mixture of infrastructure and other spending, together with tax cuts for the low-paid and for businesses. It's bold, all right, with the CBO announcing a expected deficit of $1.2 trillion in 2009 without the new boost (and that is an underestimate in any case because of the "current law" rule under which the estimate is calculated). The speech was mainly a call to Congress for co-operation on a plan that is both very big and quickly enacted, and an effort to explain to voters why such drastic action is necessary.

I understand that some might be skeptical of this plan. Our government has already spent a good deal of money, but we haven't yet seen that translate into more jobs or higher incomes or renewed confidence in our economy. That's why the American Recovery and Reinvestment Plan won't just throw money at our problems - we'll invest in what works...

Instead of politicians doling out money behind a veil of secrecy, decisions about where we invest will be made transparently, and informed by independent experts wherever possible. Every American will be able to hold Washington accountable for these decisions by going online to see how and where their tax dollars are being spent. And as I announced yesterday, we will launch an unprecedented effort to eliminate unwise and unnecessary spending that has never been more unaffordable for our nation and our children's future than it is right now.

We have to make tough choices and smart investments today so that as the economy recovers, the deficit starts to come down. We cannot have a solid recovery if our people and our businesses don't have confidence that we're getting our fiscal house in order. That's why our goal is not to create a slew of new government programs, but a foundation for long-term economic growth.

That also means an economic recovery plan that is free from earmarks and pet projects. I understand that every member of Congress has ideas on how to spend money. Many of these projects are worthy, and benefit local communities. But this emergency legislation must not be the vehicle for those aspirations.

The scale if anything seems too modest. With the recession still worsening, an injection of $500 billion to $750 billion in year one looks warranted--though we might very well end up in that range by the time the deal is done. The evidence is not entirely clear cut, but most researchers find that spending increases have bigger multipliers than tax cuts, so it is right to tilt the package in that direction, as Obama intends. Finding and quickly starting enough good infrastructure projects might be a problem, but there is plenty of scope for general revenue help for the states, and for expanding and improving unemployment assistance and the food stamps program. I'd look at wage insurance as well.

Tax cuts aimed at the low paid (ie, payroll tax cuts) could be fast acting and would have a better demand multiplier than cuts in the income tax. They belong in the mix. The case for cuts in business taxes as a countercyclical measure is harder to make, though the Obama team is considering some, partly no doubt to win more Republican support for the plan in Congress. See Howard Gleckman at the Tax Policy Center. Gleckman is no more impressed with the idea of refundable tax credits for creating new jobs, also floated by the Obama team.

Refundable tax credits for hiring new workers promise to be an administrative nightmare and won't create many new jobs. It is tough to see how a company that is seeing its sales slaughtered in today's recession is going to hire just because it gets a few thousand dollars per new worker from the government. Profitable firms would merely take the credit for bringing on workers they were already planning on hiring.

One of his commenters links to this paper by John Bishop at Cornell, who argues that when it was last tried, it worked well, and this time, with improvements, might work even better. Worth reading.

Presented by

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus


Confessions of Moms Around the World

A global look at the hardest and best job ever


A Stop-Motion Tour of New York City

A filmmaker animated hundreds of still photographs to create this Big Apple flip book


The Absurd Psychology of Restaurant Menus

Would people eat healthier if celery was called "cool celery?"


This Japanese Inn Has Been Open for 1,300 Years

It's one of the oldest family businesses in the world.

More in Business

Just In