Editor’s note: In an effort to present a variety of informed viewpoints on the recently passed $787 billion stimulus package, we asked six nationally recognized economists to give us their opinions. The views of Sung Won Sohn are presented here. The others can be found in the links to the right.
The U.S. Congress wrote the biggest check ever, amounting to 5.5 percent of the GDP over a two-year period. Even during the Great Depression, the maximum stimulus did not exceed 1.5 percent. In global context, it is larger than any government attempt.
In fact, spending the $787 billion to boost the economy will be a lot tougher than legislators think.
The tax cut, up to $800 per family, will be dribbled out through lower tax withholdings amounting to $32 per two-week pay period. Congress decided against a lump-sum payout because people are more likely to save it or pay down debt. The government wants consumers to spend.
The largesse from Washington will maintain the expenditure levels, not necessarily increase spending. A large chunk of the package, $196 billion, will support education, Medi caid, jobless benefits, etc. Without the federal aid, expenditures in these areas would have decreased. For example, $87 billion to Medicaid and $41 billion to local school districts are designed to prevent cutbacks.
Getting government permits for many infrastructure projects won’t be easy. For example, $7 billion is earmarked for bringing broadband Internet services to rural areas. This requires permits from various levels of government. The Congressional Budget Office thinks it could take as long as eight years.
The same bureaucratic red tape will hinder the disbursement of some $40 billion entrusted to the Department of Energy. For example, $30 billion is targeted for the modernization of the electric grid, improved battery technology and research to improve energy efficiency. Normally, the approval process takes years, not months.
Despite these concerns, the White House hopes to save or create 3.5 million new jobs over a two-year period. The Congressional Budget Office forecasts an increase in economic growth of 1.1 to 3.3 percent by the end of 2010.
The bulk of the positive effects will come in late 2009 and 2010 when the economy is supposed to have bottomed and begins to recover. But the stimulus will be felt beginning around mid-2009. Unemployed resources, including labor and capital, will be put to work. With the stimulus program, consumers and businesses could feel better about the economy, increasing spending.
There are long-term benefits. As roads, bridges, highways and the Internet are improved, the productivity of the economy will increase, making America more efficient and competitive. Education tax credits, aid for tuition and schoolbooks and modernizing schools will be very positive for the economy in the long run.
However, there are long-term negatives as well. As trillions of dollars of government debt pile up, the private sector will be crowded out in bidding for resources in the long run.
It is estimated that each dollar of government spending will reduce private investment by one-third of a dollar. The lost private investment will reduce potential economic growth in the long run.
There is no question the stimulus package is a historical event and will help the U.S. and the global economy. But the stimulus won’t be as effective as it should be unless the financial markets stabilize, pumping vital oxygen into the slumping economy.
The basic problem in the financial markets is that “trust,” the bedrock of the financial system, has been shattered. This is the reason the massive amount of liquidity is not moving around the economy. The U.S. banking system has so much unused liquidity that it has parked close to $1 trillion at the Federal Reserve.
It is imperative the Obama administration introduce a tangible plan to improve confidence in the credit process. Without that improved confidence and trust, we could be disappointed with the stimulus program again.
Sung Won Sohn is a professor of economics at California State University, Channel Islands. He previously was chief economist at Norwest and Wells Fargo. Bloomberg ranked him in 2001 as one of the five most accurate economic forecasters.
