Project Heal

The U.S. Economic Stimulus Plan and the California Proposed Budget Cuts highly trigger people’s interest to voice their concerns. It is essential that community leaders and advocates understand what implications budget cuts have on the services, programs and the community that we serve. Through Project HEAL—Health, Education, Advocacy and Leadership—the community can address such issues at the local, state and federal levels of government. But before taking any step forward, there is an innovative learning process in order to become successful. Project HEAL offers workshops that promote leadership and a better understanding of what it means to be a successful community advocate.

To better understand the issues, below is an article from the Los Angeles Times that illustrates “The U.S. Economic Stimulus Plan” followed by an analysis.

Backgrounder: The U.S. Economic Stimulus Plan

By Lee Hudson Teslik

January 27, 2009

Introduction

President Barack Obama took office in January 2009 facing the country's biggest economic crisis since the Second World War. Obama and Democratic Party leaders have suggested an economic stimulus package to confront the crisis. This package, they say, will save or create over three million U.S. jobs and provide most Americans with tax cuts. In the longer term, Obama says his plan will stimulate vital sectors of the economy such as energy and health care, making U.S. firms more competitive internationally. When Democratic lawmakers first introduced stimulus legislation in early 2009, they presented a bill with a price tag of $825 billion, though many analysts say the total cost of the plan will likely increase as it makes its way through Congress. The package comes amidst a global wave of stimulus spending, and if it succeeds in pulling the U.S. economy from recession, economists say, the positive impact could be felt around the world. Yet experts also see a number of ways the plan could go wrong. Some encourage targeted, temporary spending measures and say lawmakers should take budgetary concerns into consideration. Doing too little to solve the financial crisis could prove calamitous, they say, but legislative overreach could also have serious consequences.

Obama's Stimulus Plan

Obama's plan aims to stimulate employment, certain critical economic sectors, and U.S. consumer spending. It specifies $550 billion in spending on new projects and $275 billion in tax cuts. The initial plan includes investments for:

- Energy, including $32 billion to transform the U.S. energy grid to make it more efficient; $16 billion to repair public housing and make it more energy efficient; and $6 billion to weatherize low-income homes;

- Science and technology, including $10 billion for new scientific facilities and $6 billion to improve broadband Internet access in rural areas;

- Infrastructure, including $30 billion for highways; $31 billion to modernize federal buildings and other public infrastructure; $19 billion for clean water, flood control, and other environmental investments; and $10 billion to improve public transit and rail infrastructure;

- Education, including $41 billion for local school districts, $79 billion in outlays to states to prevent educational service cutbacks; $15.6 billion to broaden the federal Pell Grant program, which gives need-based grants to fund education; and $6 billion to modernize higher education programs; and

- Health care, including $87 billion for Medicaid; $20 billion to improve health information technology; and around $4 billion to improve preventative care.

The plan also includes $140 billion directed toward tax cuts of $500 per worker or $1,000 per family over two years; expanded tax credits for working poor with children; and a $2,500 college tuition credit. The House Ways and Means Committee approved the tax portion of the bill on January 22, though it has yet to pass the entire House of Representatives.

Some analysts say the Obama administration's spending on economic stimulus will be broader than what's included in the stimulus spending plan. "You've got to look at the whole picture," said Adam Posen of the Peterson Institute for International Economics in a January 2009 interview. Posen and several other analysts have noted that stimulus spending could come in many ways beyond what's in the plan, including:

- The Treasury's $700 billion in TARP funds, initially aimed at stabilizing the financial sector, seems likely to be used to provide relief to other industries and "for things that look more like stimulus and less like asset purchases," according to Posen;

- Automatic economic stabilizers like extensions of unemployment insurance;

- Expansions of health insurance;

- Some form of "mortgage relief" aimed at helping Americans facing default;

- Federal Reserve purchases of mortgage-backed securities and perhaps other types of distressed securities in the future; and

- An expanded GI bill for returning veterans.

Posen says the Obama administration, "for understandable political reasons, doesn't want to put it all under the cover of one title called stimulus, in part because these things have their individual merits, but in part because they don't want to have a bill of $1.5 trillion."

Analysis

Stimulus as a Strategy

Economists disagree on the wisdom of extensive stimulus spending, as well as the particulars of the current U.S. plan. Given the current economic climate, most mainstream economists now say that the potential downsides of collapse are sufficiently grave that large stimulatory expenditures may be necessary. As the global financial and economic crisis has worsened, this viewpoint has gained international popularity. In a December 2008 paper released by the UN Conference on Trade and Development, leading UN economists call for coordinated stimulus packages across the world's leading economies, above and beyond the money already spent to boost credit market liquidity.

Two scholars from the conservative Heritage Foundation argue in a December 2008 paper that the best medicine for the U.S. economy would be to reduce overall government spending. CFR Senior Fellow Amity Shlaes adds that governments can throw good money after bad if they seek to stimulate unsustainable businesses. "It can be perverse because you stimulate something [i.e. an industry] that's really pretty weak and should maybe fade," Shlaes told CFR.org. In a December 2008 op-ed, Shlaes also argued that huge public works projects often fail to revive national economies, as evidenced by Japan's experience during the 1990s.

Disagreement over Tax Cuts

Some people who support the idea of a stimulus package, including some of those within Obama's Democratic Party, still criticize aspects of the president's plan. Rep. Barney Frank (D-MA), the chairman of the House Financial Services Committee, has criticized the plan for its tax cuts, saying they extend further than he would have wanted. Joseph Stiglitz, the Nobel laureate economist and Columbia professor, supported Frank's position in a Financial Times op-ed.

The chairman of Obama's Council of Economic Advisers, Christina Romer, and another economist, Jared Bernstein, who works for the office of Vice President Joseph R. Biden, Jr., explain the rationale behind the tax cuts in a recent paper. In the paper, Romer and Bernstein acknowledge that tax cuts and fiscal relief to states will likely create less of an immediate economic boost than direct government investments in infrastructure. But they defend the tax cuts on the grounds that there are limits to the amount of money the government can invest efficiently and quickly in infrastructure; therefore, they conclude that some outlays for states and for tax cuts are merited, given the severity of the current economic climate.

Risks of Large Stimulus Packages

Economists point to several possible risks posed by large stimulus packages and say lawmakers would be well advised to take these risks into consideration as they mould the current package. Most basically, there is a risk that the stimulus package won't work, or won't do enough, and that the economic crisis could continue despite massive government expenditures.

Beyond that basic risk, experts say there are several contingencies under which the stimulus plan could prove problematic, even if its works in many of its goals. A January 2009 paper by two Brookings Institution fellows, one of whom, Jason Furman, was a senior economic adviser to Obama's campaign, argues stimulus spending should be:

- Timely, to guarantee that spending affects the economy when it is needed most, and to prevent against capital injections leading to overexpansion or rapid inflation.

- Targeted, to make sure each dollar spent creates the maximum possible bump in short-term gross domestic product (GDP), and to make sure that spending benefits the people most adversely affected by the economic slowdown.

- Temporary, to prevent unnecessary strain on a country's budget in the long run.

Economists say an important determinant of the long-term success of Obama's plan will be the degree to which he is able to follow these principles and prevent short-term stimulus from turning into massive long-term budgetary obligations. The size of the U.S. budget and current account deficit remain major concerns. The nonpartisan Congressional Budget Office forecast in early January 2009 that the U.S. deficit will tally $1.2 trillion in fiscal year 2009, which would mark the highest U.S. budget deficit as a percentage of the country's GDP since World War II. The Financial Times examines this risk in a January 2009 editorial and concludes that the contours of Obama's plan are "mostly right" in that they seem to acknowledge that some of the fiscal expenditures called for in the bill should be temporary.

Source: The New York Times http://www.nytimes.com/cfr/world/slot3_20090126.html

Posted at 10:00 PM ET on Sep 16, 2008