Weak Stimulus

President-elect Barack Obama has clearly demonstrated that he knows the stakes when it comes to the economic crisis. In an address on the economy last Thursday, he said, “we need to act boldly and act now to reverse these cycles.” Regrettably, his proposed action, the American Recovery and Reinvestment Plan, falls well short of bold. A $775 billion dollar bill might be the best way to win bipartisan support, but threatens to leave our economy in recession for years, sell the American people short, and tarnish Obama’s presidency.

Obama’s economic team has filed a comprehensive report on ARRP. According to New York Times economist Paul Krugman’s analysis of the report, “the plan would close only around a third of the output gap over the next two years.” Furthermore, it will only lower unemployment from about 9 percent to 7.5 percent, while the economy’s target unemployment rate, the natural rate, is about 5 percent. By the standards of the president-elect’s own economists, the plan will leave America with high unemployment and a weaker economy.

This economic crisis is widely regarded as the greatest crisis since the Great Depression. Such a crisis dictates leaning toward a stimulus that might be too large, certainly not toward one that is too small. If all goes according to plan, which is a leap of faith in itself, this plan still leaves millions of Americans in the unemployment line. In addition, unemployment statistics present an incomplete picture of unemployment. Job losses are not the only concern, but also the scarcity of job opportunities for people entering the workforce.

Obama considered a stimulus ranging from $800 billion to $1.3 trillion, he said in an interview with CNBC on Jan. 7. By choosing a stimulus package on the lower end of that range, he avoids a fight with Republicans in the senate. Instead, Democrats like Sen. John Kerry and Sen. Kent Conrad have been critical of the bill. Obama wants a bill passed with 80 votes, clear bipartisan support, but that vision has shrunk the bill, rendering it much less effective. As a result, Obama risks alienating his Democratic base. Many Democratic senators have shown clear disapproval about the plan’s size and its emphasis on business tax cuts as opposed to government spending. Obama’s admirable vision of bipartisanship should not come before what is best for the American people.

A truly effective stimulus plan jolts the economy by lifting consumer confidence, since tax cuts can only increase economic activity when people spend, not save. A bigger plan would undoubtedly lead to more consumer confidence, especially if Obama had been brave enough to break the trillion-dollar mark. The flurry of news headlines and television news stories that would accompany such a big figure would show the public that Obama is serious about bringing up the economy, and hopefully motivate them to spend.

As the plan goes forward, it is important that our money goes to the right places. Obama’s dedication to creating private sector jobs is laudable, and will avoid inflating the public sector. In this way, the jobs he creates in competitive industries will be permanent. Constant oversight of the plan’s funds is necessary to ensure that they are spent as efficiently as possible.

According to the Romer-Bernstein report, the effects of this plan will last until late 2011, with unemployment still 1.5 percent higher than the natural rate. This stimulus package could define the first term of Obama’s presidency—there is no margin for error.