The president is half right. We cannot do nothing. We face the most serious threat since 1929, and only the state has the means to do something and do it quickly. Where he is half wrong is in the nature of the something: The stimulus package is misbegotten. (I withhold judgment on the ill-defined Timothy Geithner financial rescue, where clearly it would have been better to burn some midnight oil over the details before unfurling the flags.)
Our predicaments escalate. The confidence of consumers has been destroyed. They are hoarding cash, paying down debts, and slashing discretionary spending. Car sales are down some 70 percent over the past two years. Ditto for new-home building. If Americans save as much of their incomes today as they did in the early 1990s (approximately 6 percent, which compares with virtually zero in 2007), our economy will lose around $750 billion in demand and buying power. Add to this diminished business investment and international trade, and this year we face a potential drop in demand of as much as $1.5 trillion.
Consumer fears and constraints are not irrational. The value of Americans' principal asset, their home, has fallen sharply for two years and without any sign that prices have bottomed out. The loss in homeowner equity is at least $5 trillion and may increase to around $8 trillion. And the second-largest household asset, retirement money, especially in 401(k)'s, has dropped by at least $3 trillion. Meanwhile, approximately 11.5 million people are unemployed—and that's an understatement. Include part-time workers who want and need full-time jobs and those who have given up looking, and that adds roughly 22 million workers. And this doesn't even account for the need of an additional 1.7 million jobs over the past 13 months just to keep up with population growth.
Here's a want ad: "Urgently needed. Clear-cut, powerful stimulus to create U.S. jobs."
Here's the unsatisfactory response from Washington: a massive piece of legislation that provides some $800 billion worth of spending and tax cuts but too little job stimulus.
Clearly, it was hard to reconcile the need to spend quickly and the desire to spend well, but the Obama administration let the House Democrats build a Trojan horse for pet projects promoted by special interest groups, as well as those who want to expand government through new social programs. Too much of that bill had little apparent connection with economic growth. Everything became stimulus: $2.1 billion for Head Start, $6 billion for wellness preservation, $200 million for birth control, money for the arts, money for federal vehicles, money for digital TV coupons, money for the community activist group ACORN, $6 billion for government buildings, $400 million for global warming research, $2.4 billion for carbon-catching demonstration projects.
Instead, we need an accelerated spending infrastructure whose multiplier effect will maybe double the impact of its dollar amount (and virtually all of which would be spent in the United States). Aside from the overly cited "crumbling" bridges, there should be much greater emphasis in the bill on transportation—on mass transit and high-speed rail, which would carry the bonus of reducing oil imports, lowering greenhouse gas emissions, and relieving highway congestion that now costs us $78 billion in wasted productivity and fuel. The main problem with infrastructure is the timetable. Only 40 percent of the proposed program would be spent in the first two fiscal years.
The House bill, for all its faults, was right to allocate money to cash-strapped state governments. Alas, the Senate cut $40 billion from state aid, as well as $16 billion from the construction of badly needed new schools.
As to taxes, the Senate allocated one third in cuts, including $70 billion to protect thousands of middle-class Americans from paying the alternative minimum tax, a provision unlikely to give much lift to the economy or create much in the way of new jobs. The Democrats focused on Obama's pet program of providing a tax rebate, in effect a welfare program, to those people who don't pay income taxes. This will also have a minimum effect on the economy in terms of stimulating new jobs. What might have been barely defensible in rhetoric to win an election would now take money away from the real problems we're facing.
Corrected on : Corrected on 02/17/09: An earlier version of this article misstated the eventual loss in homeowner equity and the amount of stimulus money for global warming research. The loss in homeowner equity may increase to around $8 trillion, and the amount of stimulus money for global warming research is $400 million.