Comment on the Obama Stimulus Proposal
February 2, 2009Summary
The stimulus package proposed by President Obama should be limited to the following three objectives:
- Creating additional demand for durable goods produced domestically;
- Assisting states in closing budget shortfalls caused by the recession;
- Providing extended unemployment benefits as deemed necessary.
The Current Economic Situation
Last week, the Commerce Department reported that GDP for the fourth quarter of 2008 fell at a seasonally adjusted annual rate of 3.8 percent. Purchases of durable goods fell at a 22.4 percent rate during the same period. Durable goods are typically harder hit during a recession, when households and businesses postpone investments in higher-priced items and revert to a subsistence level of spending.
Most states are facing budget shortfalls as a result of the recession. The largest of these shortfalls is California's, at about $40 billion for the combined fiscal 2009-2010.
Roughly two million Americans have lost their jobs in the past year. At present, their prospects of re-employment are poor, and they need continuing unemployment benefits.
Analysis
As shown by the recent durable goods data, the manufacturing sector has been hit much harder by this recession than the economy as a whole. Widespread closure of factories would result in lasting damage to our economy. In order to aid manufacturing, government spending and tax cuts should be designed to bolster the demand for durable goods that are domestically produced.
While it is true that any type of government spending has a stimulative effect in the macroeconomic sense, the stimulus will dissipate rapidly if the spending is not microeconomically targeted. For example, one can easily imagine a scenario where the proposed $500 per-person tax credit would be saved, or spent on food and imported goods, rather than spent on domestically produced durable goods.
During the presidential campaign, President Obama originally proposed infrastructure spending as a way of helping the manufacturing sector. Representative John Mica of Florida has lamented, however, the inadequacy of the infrastructure spending in the Obama stimulus package. Washington Post, January 28, 2009. He favors spending $165 billion on the construction of regional high-speed rail lines. Id. In my view, this proposal merits serious consideration because of its potential to create demand for durable goods, in addition to its intrinsic value.
Even if infrastructure projects spend money slowly in their initial years, it is still worth including them in a stimulus package because we cannot assume that this recession will be a short one.
For a more immediate stimulus, though, Harvard Professor Martin Feldstein has proposed a "consumer durable and home improvement [tax] credit" to encourage individuals to make long-term investments in durable goods. Newshour with Jim Lehrer, January 29, 2009; Washington Post, January 29, 2009. I think this is an excellent proposal, provided that the credit can be designed to apply only to the purchase of domestically produced durables. Perhaps a list of qualifying durable goods can be drawn up. Professor Feldstein has also advocated increased spending to rebuild the military in the aftermath of the Iraq and Afghanistan wars. He points out that military procurement usually proceeds faster than civilian projects and is more likely to utilize domestically produced goods. Washington Post, January 29, 2009. This is also a good proposal.
Some of the stimulus package should provide needed relief, even if such relief is not targeted in the microeconomic sense. As University of Texas Professor James Galbraith points out, aid to state and local governments is necessary due to large budget shortfalls. Newshour with Jim Lehrer, January 29, 2009. Because of federal budgetary concerns, however, I do not believe that this is the time for any expansion of social programs, either at the federal or state level. The one exception I would favor, though, is extending unemployment benefits, due to the weak job market.