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Feb 17, 2009 | 14:49 GMT

9 mins read

United States: A Look at the Stimulus Plan

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Summary
U.S. President Barack Obama has pledged to sign an economic stimulus package worth nearly US$800 billion into law Feb. 17. Most of the items in the package can only be very loosely defined as actual economic stimulus.
An economic stimulus package worth nearly US$800 billion has now been approved by the U.S. Congress, and President Barack Obama has pledged to sign it into law Feb. 17 in Denver. Most of the spending in the package can be defined only very loosely as actual stimulus. In part, this is by design: Obama has noted that he is using the recession as an opportunity to begin work on several long-term goals, such as the promotion of renewable energy. An item-by-item analysis of the package reveals a few instances of true, immediate stimulus, accompanied by some gradual, delayed or one-off stimulus, as well as some items with an unpredictable impact. Much of the package, however, simply cannot be defined as economic stimulus at all. (In the analysis that follows, the spending items listed are not exhaustive, but cover the major initiatives of the legislation.)

Immediate Stimulus

To qualify as true economic stimulus, the money spent not only has to contribute directly to demand and/or create jobs, but also has to do so in a manner whose effects will create yet more demand and/or jobs. For example, building a new road or expanding the capacity of an existing road (rather than simply repairing an old road) not only creates jobs immediately to build the road, but also opens up avenues for additional economic growth in the future. Another example is a pre-emptive tax credit or rebate that lands in the hands of the taxpayer up front so that it can be spent now. Such strategies of course do not always work — how the money is spent is up to the taxpayer — but they do provide among the best chances to get the money into active circulation immediately.
  • The stimulus plan sets aside US$20 billion for "green jobs," which include everything from the energy efficiency remodeling of federal buildings and schools to building renewable energy installations such as wind turbines and solar panels. If this works, it would contribute to the formation of an entirely new and beneficial economic sector — the very definition of effective stimulus spending.
  • Americans drawing on supplemental security income would receive a one-time payment of US$250. This benefit goes primarily to those on limited income and so is likely to be spent shortly after being awarded.

Trickled Stimulus

Some items are technically stimulus, but their effect will be spread out over time. So while they may help the system recover, they are less a shot in the arm than they are pre-planned rations for the future. Specifically, these items serve as a midterm boost gradually applied between now and the end of 2009. The best examples of this are a tax cut that hits every paycheck a worker receives between now and year's end, and additional support for the unemployed stretching for a few months (the unemployed tend to spend any money they receive as soon as they receive it). An effective economic stimulus package will contain mostly items from the first (immediate) category, with a sizeable minority from this second (trickled) category, on the theory that the economy needs a swift jump-start and then a helping hand for a limited amount of time.
  • Tax credits will be distributed on a weekly basis, at about US$13 a week per wage earner starting in June. Over the course of 2009, single tax payers will receive US$400 and couples US$800.
  • Americans drawing unemployment checks will receive an extra US$25 per check.
  • A temporary assistance emergency fund for needy families will be set up in the amount of US$3 billion.
  • The first US$2,400 of unemployment benefits received in 2009 will not be taxable.

Deferred Stimulus

"Deferred" stimulus is much like trickled stimulus, except that these items will have minimal immediate impact. In fact, most of the effects will not be felt until early 2010. These items include tax rebates and cuts to the 2009 tax bill (which taxpayers will receive in 2010).
  • First-time homebuyers purchasing a home before Dec. 1 will receive a US$8,000 tax credit. While this would in theory support the housing industry now, the tax benefit will not be realized until 2010, making it likely that potential homebuyers will wait until the last minute before making a purchasing decision.
  • The US$1,000 child tax credit will be extended to more taxpayers who typically do not earn enough to pay taxes, and so normally would not benefit from the credit.
  • The Alternative Minimum Tax will not be charged to middle-income and wealthy taxpayers.
  • College students or their parents will receive a tax credit of up to US$2,500 on tuition and related expenses in 2009 and 2010.

One-Off Stimulus

One-off stimulus items do increase spending/demand temporarily, but because they have negligible follow-on effects they are rarely effective at jump-starting a recessionary economy. They create no demand and/or jobs independent of the spending itself, and any stimulus effect created ends almost immediately once the spending stops. Most stimulus initiatives carried out by Japan during its recessions in the 1990s falls into this category. Education spending almost invariably falls into the "one-off" category, as does repairing infrastructure that is still broadly functional (replacing destroyed infrastructure or expanding infrastructure, in contrast, is true immediate stimulus). This is not to say that items in this category are pointless — education spending, for example, is critical for a successful economy in the long term — but it does not generate any additional short-term economic activity in and of itself.
  • The Department of the Interior will receive US$735 million for road repair in national parks.
  • The Department of Interior and the Environmental Protection Agency (EPA) will receive US$9.2 billion for projects ranging from energy efficiency improvements to visitor centers to the cleanup of abandoned mine sites on public lands.
  • The plan makes US$25 billion available for teachers' salaries.
  • Early education and childcare programs will receive a US$4 billion package.
  • The EPA will receive US$800 million to clean up hazardous waste sites and gasoline storage tanks.
  • The plan sets aside US$3.7 billion for the hiring of new police officers and US$1 billion for the hiring of local officers under the Community Oriented Policing Services program.
  • Law enforcement on the Mexican border and in rural areas, Indian tribe law enforcement, programs that help crime victims, youth-mentoring programs and efforts to fight Internet child predators will receive US$765 million.
  • States facing budget deficits will receive an injection of US$87 billion for Medicaid.
  • The government will pump in US$90 billion for highway repaving, new water lines and old bridge reinforcement.

Unknown

Some funding will be distributed to state and local governments. Because those entities have wide latitude as to how to spend the money, it is impossible to assess what other category such funds would fall into. Most states tend to use such funding to defer budget cuts, so a good portion of this money will likely ending up being classified as trickled stimulus.
  • Inject US$54 billion to fill gaps in state budgets that could result in education funding cuts and teacher firings. Of this, US$8 billion must be used for modernization and renovation projects.

Not Stimulus

Some programs in the stimulus package cannot be economically classified as stimulus. That is not to pass judgment on whether these items are good or bad ideas politically, socially or otherwise — just to say that they do not fall under any economic definition of stimulus. In some cases, this is because they are tax rebates designed to reward purchasing activities that normally disappear during a recession (most companies, for example, would be unlikely to take advantage of a green-renovation tax break during a period of severe financial distress). In other cases it is because they are one-off funding commitments with no clear impact on employment or growth. And for others it is because they affect individuals who do not contribute to the labor pool.
  • Homeowners will receive a tax credit to cover as much as 30 percent of the cost (up to US$1,500) of remodeling their homes for energy efficiency (adding energy-efficient windows, furnaces and air conditioners). This is the sort of activity that normally only takes place in times of extreme economic growth, so a tax credit that would not be earned until 2010 is unlikely to affect spending decisions. (Note that green remodeling of government buildings is in the "immediate stimulus" category, because the federal government has direct control over how the money is spent, as opposed to this program which encourages the private sector to follow suit.)
  • The government will help pay health insurance premiums up to 65 percent of the total cost for laid-off taxpayers, defraying costs under the current Consolidated Omnibus Budget Reconciliation Act (COBRA) program which allows fired employees to keep their coverage for 18 months but at the full cost of the premium. The COBRA program only applies to companies employing a minimum of 20 employees. Employees laid off but not eligible for COBRA will be allowed to sign up in 60 days.
  • The government will offer direct grants to producers of wind turbines and will inject US$2 billion into next-generation batteries to stimulate technology innovation.
  • The plan will give US$300 in rebates for the purchase of new, efficient appliances and US$5 billion for energy improvements for low-income homeowners.
  • The stimulus will get an extra 800,000 students into the Pell Grant program, which allows low-income students to attend college, and will increase the grant US$4,731 to US$5,350 for 2009 and US$5,550 for 2010-2011.
  • Tuition tax credits will be increased to US$2,500 and will be 40 percent refundable for those families who do not earn enough to have to pay taxes and thus take advantage of the credit.
  • Scientific research will be supported with US$15 billion, with the National Institute of Health distributing US$1.5 billion to university research facilities.
  • There will be an injection of US$2 billion for prisoner rehabilitation programs under the Byrne Justice Assistance Grant.

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