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A Step Forward, a Stumble Back

Parsing the Economic Stimulus and Recovery Legislation

SOURCE: AP/J. Scott Applewhite

Senate Majority Leader Sen. Harry Reid (D-NV), center, talks about the Senate's work on the economic stimulus bill on February 6, 2009. The Senate compromise stimulus would create between 430,000 and 538,000 fewer jobs than the House-passed bill.

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Read also: House Recovery Act Creates More Jobs than Senate Compromise

The compromise legislation now before the Senate—designed to garner the needed 60-vote supermajority for the American Recovery and Reinvestment Act—is an important step toward quickly slowing the downward spiral of the U.S. economy and eventually turning it around. The economy has lost 3.6 million jobs since the recession started, with 1.8 million lost over the past three months alone. This is the largest three-month decline in jobs since World War II. Action is desperately needed quickly.

Yet the Senate compromise legislation is also a stumble backward from the $820 billion legislation that passed the House of Representatives on January 28. The Center for American Progress estimates that the compromise would create between 430,000 and 538,000 fewer jobs than the House-passed bill—a finding consistent with what other economists, including Paul Krugman, reported over the weekend.

It isn’t surprising that the bills are different. In order for this bill to pass it will require 60 votes in the Senate, which means progressives and conservatives must find a middle ground. However, the Senate conservatives have not used that power to improve the package. Instead their efforts have created a weaker compromise—though the package would still benefit the economy greatly. Fortunately, the process for reconciling the House-passed legislation and the Senate compromise will allow the two houses of Congress to work together to ensure that the final legislation deals effectively with the great challenges facing the country. It is imperative that they act quickly.

The American Recovery and Reinvestment Act of 2009 adopted by the House is a well-designed package. The House struck a good balance as it strove to provide a very large economic stimulus that moves into the economy as quickly as possible, supports long-term economic growth and spends funds responsibly. Although some of the provisions have been criticized for not offering enough help to the economy quickly enough, they are a very tiny share of the package. Moreover, the prospects for a quick economic recovery are slim, which means it is appropriate for a portion of the spending to be spread out beyond the next year.

Conservative claims that there is substantial wasteful spending in the House legislation are spurious, as my colleague Will Straw detailed in his analysis “Where’s the Pork (Nowhere)” several days ago. The House bill would efficiently provide a much-needed, strong boost to a deeply troubled economy. What’s more, the Obama administration has detailed how it will ensure all spending is transparent and accountable.

The Senate version of the legislation started out in the same spirit as the House-passed bill. The Senate bill has been consistently larger than the House bill as it has moved through the legislative process—$885 billion initially, with amendments since introduction bringing the total to close to $940 billion. A larger share of the Senate bill has been subject to criticism that it does not provide swift economic stimulus, but that portion is still quite small. With its overall size being larger, the Senate bill’s effectiveness has been comparable to the House’s version.

The challenge, of course, will be actually passing the Senate legislation. The rhetoric of those championing the effort to form a bipartisan compromise in the Senate was encouraging, with its emphasis on the need to more narrowly target the legislation on the specific goal of reviving the economy as quickly as possible. The Senate bill has had more ill-targeted provisions than the House bill. Thus, although both bills overwhelmingly consist of provisions that are good public policy, it was reasonable of those senators looking to change the legislation to suggest that provisions less connected to the immediate goal belonged in other legislation or shouldn’t be done at all.

Under the influence of the conservatives who are forcing the compromise, however, what has emerged is about as ill matched to their rhetoric as possible. The Senate compromise proposal preserves provisions that are among the least effective at providing rapid stimulus to the economy and scales back some of the provisions that provide the most.

Of particular note, the Senate compromise cuts aid to the states, one of the most effective ways to help the economy immediately. States are already cutting back or furloughing workers, which is aggravating the problems created by the private-sector downturn. Of the $83 billion that the Senate compromise cuts from the existing Senate bill ($78 billion relative to the House legislation), $40 billion of it was for funding to help stabilize state finances. Without that help, states will become even a bigger part of the economic problem as they are obliged to expand layoffs and make further cutbacks in services.

The Congressional Budget Office identifies federal transfers to state and local governments as among the most effective ways to stimulate the economy per dollar spent—better than all forms of tax cuts. Widely cited Moody’s Economy.com chief economist Mark Zandi reaches the same conclusion, ranking help for states beneath only certain low-income benefits and infrastructure spending, but above all forms of tax cuts. Cutting back in the compromise on this highly effective way of boosting the economy is clearly a mistake.

Similarly, the Senate compromise cuts $16 billion in investments in school infrastructure. Yet the American Society of Civil Engineers estimates that spending $127 billion to $268 billion is needed to bring school facilities to a good condition. The projects these funds would pay for are among the infrastructure investments that can be brought up to speed very quickly. The construction sector, which would benefit most from this funding, has enormous idle capacity and more idle workers than any other industry, having shed 10 percent of its jobs over the past year, compared to 3.2 percent for the private sector overall. Construction spending creates jobs and has a very positive impact on the economy. The Congressional Budget Office puts transfers to state and local governments for infrastructure spending at the top of its effectiveness list, along with direct federal spending on goods and services. Mark Zandi slots infrastructure spending only below greater spending on unemployment compensation and augmenting food stamps.

Thus, over two-thirds of the spending reduction contained in the Senate compromise is in two areas that are among the most effective stimulus. And there are other smaller cuts in the remaining third of the package that make little sense if the goal is, in fact, to weed out the least effective stimulus provisions.

On the tax side, too, the changes are ill-advised. In general, tax cuts in the current economic environment will offer less of a boost to the economy than will the spending provisions. If the Senate wanted to cut back in the bill while focusing on spurring the economy and job creation, then paring back the tax cuts should have been its first agenda item. Instead, the compromise cuts only $18 billion out of the approximately $375 billion of tax cuts that were in the Senate bill—less than a quarter the amount of the spending reduction. Further confusing matters, among the provisions scaled back is an increase in the Child Tax Credit—one of the more effective tax provisions in stimulating the economy.

Even less defensible is what the compromise leaves in on the tax side while cutting effective spending provisions. The $70 billion Alternative Minimum Tax patch, in particular, stands out. The AMT patch essentially just extends existing law and thus provides no stimulus. It benefits higher income taxpayers, who are the least likely to quickly put the money back in the economy (they don’t have to). Both the CBO and Mark Zandi put this near the bottom of their lists for per dollar benefit to the economy—with only cuts in corporate taxes and extending the Bush tax cuts ranking lower. If the intent is to weed out provisions that offer weak stimulus, this should be the first to go. Taking out the AMT provision would, alone, allow almost all of the spending provisions to be restored without changing the size of the package.

Another tax provision the Senate compromise leaves in is the $35.5 billion tax credit for homebuyers, which was added as an amendment in the Senate. This provision gives a $15,000 tax credit, or 10 percent of home value (whichever is less), to anyone who buys a home. With a glutted housing market where most home values have fallen far more than $15,000, and are still falling, this very expensive tax break is unlikely to have a noticeable effect on the market. The benefit will primarily go to those who were going to buy homes anyway—offering them a windfall that will not substantially benefit of the economy.

The preservation of the $20 billion Net Operating Loss tax break in the Senate compromise is also misguided if the goal is to preserve the best and clip the weaker parts of the overall package. CBO ranks this tax cut as having the least impact per dollar on the economy of the provisions it considered. Zandi did not consider this provision specifically but ranked similar provisions very low. This provision gives tax refunds to money-losing corporations and is a classic example of throwing money at a problem and hoping something good happens.

The nation clearly needs strong Recovery and Reinvestment legislation. Without it our economy will continue to spiral downward. The situation requires at least $800 billion targeted to the investments that will provide the best bang for the buck in getting the economy back on track.

The House-passed bill meets this standard. The Senate bill, as originally introduced, also did. The compromise that has been worked out in the Senate can, no doubt, help the economy. The fact that there is an agreement to do something is very encouraging. It’s unfortunate, however, that under the influence of conservatives, the compromise has actually accomplished the opposite of what the effort’s champions said they were trying to do. They have removed some of the provisions that would do the most for the economy while keeping some that are the least effective.

It would be easy in the course of debating such strongly contested complex legislation to focus on what is controversial and lose site of the overall legislation and what it can accomplish. That’s why it is important to note the Senate compromise contains important investments in infrastructure, energy, health, education and other areas that will both provide an immediate boost to the economy and help our long-term growth. The compromise also contains provisions to help those who have been hurt the most during this 14-month-and-counting recession. The Senate compromise also reduces taxes for middle- and low-income families, which will help struggling families and help improve the economy by increasing demand.

In short, the Senate compromise would provide a great boost to the economy—but legislation closer to the House-passed version (or the version originally introduced in the Senate) would do more. The process over the coming days will allow the two houses of Congress to get together and try to hammer out the best legislation to serve the needs of our nation which anxiously awaits government action to aggressively address the serious problems we all face.

Read more from CAP on economic recovery:

Column: Where’s the Pork? (Nowhere)

Video: Rescuing the American Economy: A Guide to How the Stimulus Works

Brief: Recovery and Reinvestment 101

Interactive Map: Beyond the Beltway: Helping Those Most in Need

Interactive: Build Your Own Stimulus Package

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