Job losses, production losses, income losses and spending cutbacks are feeding on themselves, pulling the entire private sector down at a pace that shows no sign of slowing. The public sector, two-thirds of which is made up by state and local governments, is being dragged down too, though here the pain is yet to come – governors and school boards are talking about budget cuts and layoffs, but they haven’t hit yet.
The only remedy is massive fiscal stimulus from the Federal Government, which needs to be big, bold and quick. It turns out that it’s hard to spend money very fast, so we need to be creative about how to push out money into the economy in ways that will have a real impact soon. Here are the best ideas:
- Direct aid to state & local governments: this is critical to avert a huge round of layoffs, spending cuts, and tax increases. It needs to be big, and details need to be announced immediately (weeks not months). School principals are already cutting their budgets and planning layoffs, because they don’t know whether they will really get any money, or when it might come, or with what kind of restrictions. And unlike the Feds, they can’t spend money they don’t have. This is about teachers: employment in local government education is about 8 million, four times the entire federal government.
- Increases in existing federal spending programs: any place where there is already a system in place to distribute funds, the limits can be raised. Examples include Pell grants, student loans, research grants (NIH, NSF), National Parks, NEA grants, and probably hundreds of smaller programs that would add up to real money. Whatever their current budget limits, these programs can be doubled, preferably with a use-it-or-lose-it rule that guarantees the money will be spent this year. Next year it’s back to normal unless we decide we need another stimulus.
- Tax cuts for individuals: regular checks in the mail, or a tax holiday from payroll taxes, or a series of lump-sum payments. These aren’t as effective as government spending since people won’t spend it all, but they do have the merit of going out the door immediately. It’s likely that many more people are cash-constrained than was the case a year ago, so the percentage that’s spent should be correspondingly higher this time.
- Longer-term infrastructure spending: probably a good idea to relieve bottlenecks and make urgent repairs, as well as to put a down payment on new public initiatives. It’s unfortunate that not much of this will happen in 2009, but if predictions of higher consumer saving rates are correct we will need fiscal stimulus for several years. Some ideas, like upgrading energy-efficiency in federal buildings and converting to electronic medical records, might actually reduce federal spending down the road.
Politically, this reverses the Republican approach to the economy over the last generation, which constrained domestic spending on infrastructure or poorer people, and provided upper-income tax cuts. Opposition to the current package is driven by the fear that it might work, and that Americans might approve of the new direction. Republican counter-proposals are designed to fail:
- limit the size, at a moment when every day brings tens of thousands of job losses, with pleas for fiscal responsibility that are breathtakingly cynical in the light of the trillions of public debt accumulated by Republican administrations since 1981;
- limit the aid to state & local governments – probably the most effective component of the whole effort – despite the urgent needs articulated by governors of both parties;
- add tax breaks for businesses, which are completely irrelevant in the near term, and unlikely to help much in the longer term compared to policies that might raise demand or improve the overall infrastructure of the economy.