Saturday, February 7, 2009

The Senate "Agrees" But Does Not Vote on Stimulus Plan. Now What?

Friday night, the Senate reached an agreement to pass ARRP (the American Recovery and Reinvestment Plan) with some pretty major amendments proposed by the so-called "gang of 16" moderate Senators. The amendments gut funding for states and "income support" provisions for COBRA and medicare for the unemployed (and a bunch of other stuff too) in order to make it easier to swallow for the few Senate Republicans willing to come along for the ride.

However, the Senate has yet to cast an actual vote. That's expected to happen on Tuesday. The bill, as proposed, will pass with 61 votes. Hopefully. Or not. We'll see.

Specter, Snowe and Collins - the Republicans in question - are going to be under some very intense pressure from the Limbaugh Screaming Clown Brigade for the next 48 hours...........

Once the bill passes, it has to go back to conference committee to be reconciled with the House version. This is where things could get really interesting, because the House and Senate versions are substantially different, and House members would very much like to see that the provisions gutted by the Senate be restored.

The House will be under tremendous pressure to pass the Senate bill as is for two reasons. One - the President has imposed an artificial deadline of President's day, which doesn't leave a lot of time. Two - the "moderate" Senate Republicans Snowe, Collins and Specter have threatened to bolt if the House puts back anything they find objectionable.

So what do we need to do now?

Keep calling.


Tell them a good bill is worth the extra week. We need to support this process, not rush it. Seven days won't matter in the scheme of things.

Call Senators  Specter, Snowe and Collins. Tell them you support their brave stance. DO NOT CRITICIZE THEM for gutting the bill. We need to keep them strong and focused for the next few days.

Then call Senators Boxer and Feinstein and Congresswoman Jane Harman and tell them once the bill is in committee, to restore the gutted provisions to the House version pronto.

It's that simple.

Below, is a "Cliff Notes" version of an impact report on the House version of ARRP prepared by Mark Zandi, the Chief Economist for Moody's.

This will be your secret weapon, your silver bullet. Keep it close to your heart but spread it far and wide. It explains in simple layman's terms what AARP is, and how and why it works.

Have at it.

Source: Mark Zandi - Chief Economist , Moody's


The fiscal stimulus plan proposed by the House Democrats includes a reasonably designed mix of government spending increases and tax cuts. The spending increases total about $550 billion in 2009-2010, and there are $275 billion in tax cuts. (total $825 billion)

Increased government spending provides a large economic bang for the buck and thus significantly boosts the economy. The benefits begin as soon as the money is disbursed and are less likely than tax cuts to be diluted by an increase in imports. The most effective proposals included in the House stimulus plan are extending unemployment insurance benefits, expanding the food stamp program, and increasing aid to state and local governments.

Increasing infrastructure spending will also greatly boost the economy, particularly as the current downturn is expected to last for an extended period. Most of the infrastructure money will be spent on hiring workers and on materials and equipment produced domestically.

Tax cuts generally provide less of an economic boost, particularly if they are temporary; on the other hand they can be implemented quickly. A particular plus for individual tax cuts included in the House stimulus plan such as the payroll tax and earned income tax credits is that they are targeted to benefit lower- and middle-income households that are more likely to spend the extra cash quickly

Investment and job tax benefits for businesses are less economically effective, but are not very costly and more widely distribute the benefits of the stimulus plan.

Income support

The House stimulus plan includes some $100 billion over two years in income support for those households under significant financial pressure.

This includes extra benefits for workers who exhaust their regular 26 weeks of unemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments for unemployed workers trying to hold onto their health insurance.

People who receive these benefits are hard pressed and will spend any financial aid they receive very quickly.

Another advantage is that these programs are already operating and can quickly deliver a benefit increase to recipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadly shoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, than watching unemployed friends and relatives lose their sources of support. Increasing food stamp benefits has the added virtue of helping people ineligible for UI such as part-time workers.

Aid to state and local governments

Another potent tool included in the House stimulus plan consists of some $200 billion in aid to state and local governments over two years. This takes the form of a temporary increase in the Medicaid matching rate to ease the costs of healthcare coverage; help to local school districts; and broader fiscal relief to states to prevent cuts in key programs.

More than 40 states and a rapidly increasing number of localities are grappling with significant fiscal problems. Tax revenue growth has slowed as home sales, property values, retail sales and corporate profits have all fallen. Personal income tax receipts have begun to suffer as the job market slumps. Big states including California and Florida are under severe financial pressure, and smaller states including Arizona, Minnesota and Maryland are struggling significantly. The gap between state and local government revenues and expenditures ballooned to over $100 billion.

Arguments that state governments should be forced to cut spending because they have grown bloated and irresponsible are strained, at best. State government spending and employment are no larger today as a share of total economic activity and employment than they were three decades ago.

Infrastructure Spending

Increased infrastructure spending is also a particularly effective way to stimulate the economy included in the House stimulus plan.

The plan includes $160 billion in such spending over two years, with $90 billion in more traditional infrastructure such as highway construction, public transit and waterways; a $70 billion for a variety of energy, science and healthcare projects. The boost to GDP from every dollar spent on public infrastructure is large—an estimated $1.59—and there is little doubt that the nation has underinvested in infrastructure for some time, to the increasing detriment of the nation's long-term growth prospects.

The argument against including infrastructure spending as a part of any fiscal stimulus plan is that it takes substantial time for the funds to flow into the broader economy. Infrastructure projects can take years from planning to completion. Moreover, even if the funds are used to finance only projects that are well along in their planning—so-called shovel-ready projects—it is difficult to know just when projects will get under way and when the money will be spent.

These are reasonable concerns in most recessions, but the economy's current problems appear likely to continue for some time. It is also reasonable to be worried that this spending will be used on pork-barrel projects chosen not for political rather than economic reasons. To address this worry, policymakers plan to put in place tight controls to monitor the spending.

Tax Cuts

The House stimulus plan includes an estimated $165 billion in tax cuts for individuals and $110 billion in business tax cuts over two years. The largest part of the individual tax cut is a permanent payroll tax credit for workers, amounting to as much as $1,000 for married couples.

The payroll tax credit will be particularly effective, as the benefit will go to lower income households that do not necessarily earn enough to pay income tax. These households are much more likely to spend any tax benefit they receive.

The temporary tax incentives to support business investment and hiring in the House stimulus plan do not provide a particularly large economic benefit.

Accelerated depreciation by large businesses and expensing of investment by small businesses lowers the cost of capital only modestly and is not a critical factor in businesses' investment decisions, particularly when sales and pricing are so weak. The carry-back of business losses helps cash-strapped businesses, perhaps forestalling some cuts in investment and jobs, but it is unlikely to prompt much additional business expansion as it does not improve businesses' prospects.

However, including business tax cuts in the stimulus plan is not very expensive, and they distribute the benefits of the stimulus more widely. This is useful if it expands political support for the stimulus plan and thus accelerates its adoption. Moreover, the depreciation benefits included in last year’s fiscal stimulus have expired, and extending them through 2010 would forestall a badly timed additional factor (however small) depressing business investment.

The National Economic impact

Implementation of the House Democratic fiscal stimulus plan in early 2009 would provide a sub tantial benefit to the economy.

The stimulus will not keep the downturn from becoming the worst since the Great Depression, but it will ensure that the current episode remains a recession and not a depression

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