A Workable Economic Stimulus Plan from the Economic Policy Institute

TIME TO BOOST ECONOMY IS NOW, EPI ADVISES
Economic stimulus plan makes case for quick, strong, well-targeted action to soften blow of coming recession

After months of battering by the housing and credit industries and a year of slowdown in job growth, there is broad agreement that the economy is tipping into recession or rising unemployment. This past holiday season was the weakest for retailers since 2002 making it unlikely that cash-strapped consumers will be able to buy our way out of the slump and gives credence to rising concern that the recession we’ve been dreading may already have arrived.
Against this backdrop, the Economic Policy Institute unveiled a broad-based, three-part prescription for stimulating the economy. "

EPI’s plan, titled "Strategy for an Economic Rebound," calls for federal investment of about $140 billion (1% of total GDP) – an amount big enough, when properly targeted, to make a difference. To achieve optimal targeting, that amount would be allotted among four kinds of expenditures: infrastructure, relief to the states, help to unemployed individuals, and targeted tax rebates.
Infrastructure: EPI recommends investing about $40 billion right away to accelerate needed public infrastructure repairs for bridges, schools, roads, and the environment. Such investments would address existing needs that would otherwise go unmet during a downturn. Such investments would be less likely than other kinds of expenditures to "leak" to other countries through purchases of imports. They would generate jobs not only for those working directly on these projects but would also boost and expand the businesses that supply parts and materials.
Relief to states: Another $30 billion should go to the states to help them avoid cutbacks in services, programs, and jobs that would exacerbate the recession. The money for states would be split evenly between general revenue sharing and a temporary raise in the federal Medicaid match.
Help to unemployed: Making unemployment benefits available to the long-term unemployed would, at a cost of about $5 billion, help the people hit hardest by rising joblessness. The plan lays out a number of specific reforms that EPI recommends to make the current unemployment insurance system more effective as a safety net for workers displaced by rising unemployment, which is expected to rise a full percentage point by the end of the year.
Tax rebates: $65 billion of the total investment should be dedicated to tax rebates that are targeted to those paying either payroll or income taxes-$350 per person or $700 per married couple. These rebates target those most likely to spend the money and thus create greater demand for jobs – namely working families at the middle and lower end of the income scale.

This combination of investments meets the key tests for an effective economic stimulus – in contrast to the approach taken by the Bush administration:

1. An effective stimulus plan creates jobs and economic growth: The EPI approach increases jobs directly or indirectly related to needed infrastructure repairs. The Bush administration’s "Jobs and Growth Plan" for the previous recession underperformed on both, yielding a protracted period of job losses followed by a very slow-growth recovery period. EPI’s plan will spur growth by focusing on mechanisms for increasing consumer spending through tax rebates for people who are most likely to spend the money, thus cushioning the drop in demand for consumer goods that would accelerate job losses. In contrast, approaches that funnel money directly to businesses won’t offset or stem job losses in a time of falling demand.

2. Stimulus should take effect quickly: By definition, a stimulus plan needs to provide a quick jump start to the economy. The elements of EPI’s Strategy for an Economic Rebound can be acted on and take effect quickly to shore up the sagging economy. The approaches favored by the administration – making the previous round of tax cuts permanent, for example – would come far too late to have the needed impact.

3. Stimulus should not create long-term budget deficits: The increased deficit incurred by a quick infusion of money into the economy should be temporary. EPI’s plan meets this criterion through a combination of accelerating planned spending on infrastructure needs, temporary help to states, and one-time tax rebates – unlike the permanent tax cuts favored by the Bush administration.

4. Stimulus should not exacerbate social and economic inequities. The EPI plan’s targeting of benefits to the unemployed and tax rebates to low- to middle-income families is good both for the economy and for the society. In contrast the Bush administration approach of tax cuts to the wealthy not only provides less net gain for the economy as a whole, it also aggravates the nation’s rising inequality between ordinary working Americans and the fortunate few at the top.

READ THE COMPLETE REPORT: http://www.epi.org/content.cfm/bp210