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Commentary on the Stimulus Package

The Good, the Bad and the Ugly

by Adam Price |
February 17, 2009
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San Jose, CA - Representatives of the U.S. Senate and House of Representatives agreed upon a compromise economic package Feb. 11 totaling $789 billion in federal spending and tax cuts over the next two years. The bill is expected to quickly pass the House and Senate and be signed into law by President Obama within the next week.

The good part of the stimulus package is that it will provide $63 billion in unemployment benefits, food stamps and welfare payments, as well as $87 billion to help states pay for Medicaid. In addition $21 billion will be spent to help unemployed workers pay for health insurance. This spending will help the unemployed and poor who are being hardest hit by the economic crisis.

The stimulus package also provides $92 billion in aid to education that will go to state governments, school districts, college financial aid and Head Start. Spending on transportation includes $46 billion for roads and bridges, public transit and high-speed rail. There are also billions more to help states with their budget deficits, public housing projects and water infrastructure. This aid for schools and transportation will help prevent job and service cuts as well as help fix aging infrastructure.

Not so good is the $115 billion cut in payroll taxes that go to Social Security and Medicare. This will boost paychecks about $13 a week starting in June. However this will only aid people who still have jobs, and some of it may be saved, which would not stimulate the economy. Further, the payroll tax cut only phases out for couples making more than $150,000, meaning many upper income households would also benefit.

The bad part of the stimulus package is billions of dollars in corporate and other business tax cuts. This will not only end up mainly aiding wealthy owners, but has almost no stimulus affect. There is also an $11 billion subsidy towards a ‘smart electricity grid’ that will let you know how much electricity your toaster (and every other household appliance) uses. This smart electricity grid is also making it easier for power utilities to cut off their customers, which helps their profits and hurts the thousands of people who are falling behind on their bills due to layoffs.

The ugly is the fix for the Alternative Minimum Tax (AMT), forced in by the ‘moderate’ Republicans senators whose votes were needed to pass the bill. This will cost $70 billion and almost the entire benefits will go to households earning $100,000 and up. The AMT fix will not stimulate the economy and would have been done anyway. Even worse, putting in the AMT fix meant cutting $25 billion to help the states, $16 billion in school construction and $20 billion to help the unemployed with health insurance.

Leaving aside the AMT fix, the stimulus package only comes to $350 billion a year, or about 2.5% of GDP (total output of goods and services). This is actually less than the Federal budget deficit in 2008, and is too little to get the economy moving. While many progressives have been looking for a ‘New New Deal from the Obama administration, there are no big new initiatives on the scale of Social Security or unemployment insurance that began under Roosevelt’s New Deal. No universal health care, no government jobs program, no rollback of the Bush tax increases for the rich.

A basic problem is that the economic stimulus program is mainly targeting the private sector for job creation. Businesses will not begin to hire until they see more profits to be made. But the government’s efforts to make private businesses more profitable are often at odds with getting the economy going. One example is the Federal Reserve’s new policy of paying interest on money that banks deposit at with the Fed. While this helps the banks’ bottom line, it also helps them to pile up $800 billion in deposits at the Fed, which is not being loaned out. Another example is the government’s loans to GM and Chrysler, which requires them to become ‘viable.’ So GM and Chrysler are laying off workers, closing plants, encouraging car dealers to close, cutting benefits and asking for even more wage cuts. How is this helping the economy?

The fundamental problem is that there is a historic crisis of overproduction. The economy can produce more than can be sold at a profit - so there is record number of homes standing empty, more and more cars on dealers’ lots, and unsold inventories piling up almost everywhere. Over the last 25 years a huge borrowing and spending binge was able to postpone an economic crisis. But with the financial system now on the rocks, there isn’t enough credit to keep spending going. Right now the government is trying to step into the breach by lending trillions of dollars and spending hundred of billions more. But this is not going to be enough to get the private sector profitable again. What is needed is a socialist system, where production is for people’s needs, not private profit.