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How to Spend $350 Billion in a First Year of Stimulus and Recovery

SOURCE: AP/Alan Diaz

Roberto La Rosa, right, fills out a temporary job application as Frank Piccolo, branch manager of Active Staffing Services, looks on in Hialeah, Florida on November 7, 2008. Total job losses in 2008 have hit over 1.9 million, but well-designed recovery programs could restore lost jobs.

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The U.S. economy is in as serious trouble as at any time in decades. The long-run problems of stagnant or falling wages and incomes are no longer hidden by artificially inflated asset values. The effects of the financial crisis have moved from Wall Street to the daily operations of business and the daily lives of families. Consider that:

  • The 0.5 percent decline in gross domestic product in the third quarter of 2008 was the biggest since the last recession in 2001.
  • Total job losses in 2008 have hit over 1.9 million, including 530,000 in November alone.
  • Median household income is lower than it was in 1999.
  • The values of homes fell by 2.5 percent, or $351 billion, in the second quarter of 2008.
  • One in 11 mortgages is delinquent or in foreclosure, and credit card defaults rose to 5.5
    percent of all credit card debt by the second quarter of 2008.
  • Credit-market borrowing financed 35.2 percent of fixed investment by non-financial corporate businesses in the second quarter of 2008, down from 80.1 percent a year earlier.

The time is right for a set of federal policies designed to provide stabilization, stimulus, recovery, and growth to address these huge problems. Without action, there is too great a risk of further collapse and an ever-worsening spiral of job loss and economic decline. In addition to action aimed at stabilizing the extremely shaky auto industry and financial and housing markets, Congress should act quickly to pass measures to stimulate the broad economy and commence the road to recovery. If Congress can reach agreement with President George W. Bush regarding some of the measures to be undertaken, then those measures should be passed immediately by Congress and sent to the president. The remaining measures should be passed by the 111th Congress and be ready to be signed on inauguration day by then-President Barack Obama.

Stimulus policies should be designed to offer an immediate boost throughout the economy by spurring demand. Their purpose is to quickly stall a downward spiral in the economy and give confidence to businesses to invest and hire by restoring demand for their products. But the consequences of the current downturn are not likely to be reversed quickly by traditional fast-moving stimulus measures. Also needed is a recovery program to accelerate the creation of a strong labor market and restore lost jobs over the next two years. Well-designed recovery policies create jobs efficiently—producing many good jobs per dollar of public expenditure—while making investments that further our long-term economic prospects and restore confidence in the nation’s future.

Immediate passage of stimulus and recovery measures are absolutely necessary if the United States is to avert an even more devastating economic downturn and restore lost jobs. But beyond the immediate challenges, the economy has long-standing fundamental problems that must be addressed by major changes in our nation’s approach to energy, health care, education, infrastructure, scientific research, innovation, and other areas as described in the Center for American Progress report “Progressive Growth.”2 Stimulus and recovery measures aimed at the immediate crisis should be designed, where possible, to serve double duty by providing a jumpstart in the investments needed for the country’s long-term growth.

There is a growing consensus that stimulus and recovery spending should be on the order of 2 percent to 4 percent of GDP. Nobel Prize-winning economist Paul Krugman concludes that, “the stimulus package should be at least 4 percent of GDP, or $600 billion.”3 Goldman Sachs calls for a stimulus of $500 billion.4 CAP Senior Fellow Gene Sperling, former director of President Bill Clinton’s National Economic Council and Clinton’s national economic advisor, says, “The breadth and potential depth of that demand crisis require us to undertake a bolder ‘Powell Doctrine’ on stimulus in which $300 billion to $400 billion—or at least 2 percent of GDP—should be the starting point with an understanding that more could be needed and that we will need to call for a coordinated global stimulus."

Outlined here is a proposal for how to allocate $350 billion (greater than 2 percent of GDP) in the first year for stimulus and recovery. As the economic situation unfolds, the need for additional action may become evident. But care should be taken that, whatever a final package includes, taxpayers’ funds are used efficiently to produce the best result for the economy in these difficult times. This document contains measures that would provide almost immediate economic stimulus as well as others that would have their impact later. Most of the spending outlined would occur within the year.

This document is a starting place. The programs here meet the criteria of either moving very quickly to spur demand or being efficient job creators, and in many cases, they provide a jumpstart to addressing long-term, fundamental economic needs. The programs described here are not the only ones worthy of inclusion in a stimulus and recovery package. In particular, other policies that move money quickly into the economy should be considered. Procurement programs such as replacing aging vehicle fleets at the federal, state, and local levels could be sped up. Money for defense procurement or research and development that has been authorized but not spent could also be brought forward. There are programs that could be responsibly accelerated within almost every government agency to help give the economy the boost it needs. If the state fiscal situation gets worse over the year, increasing aid to states beyond what is proposed here may be prudent.

In broad categories, the $350 billion package outlined here includes approximately:

  • $55 billion to spur demand and assist those most in need.
  • $70 billion aid for state and localities.
  • $175 billion for infrastructure investments in stimulus and recovery, including $100 billion in green job creation.
  • $50 billion for tax cut stimulus.

Read the full report (pdf)

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