Georgetown University’s Newspaper of Record since 1920

The Hoya

Georgetown University’s Newspaper of Record since 1920

The Hoya

Georgetown University’s Newspaper of Record since 1920

The Hoya

Taking Stock of the Stimulus

It’s decision time. The U.S. Senate has spent this week considering the economic stimulus package that the U.S. House of Representatives passed last week. The bill, the American Recovery and Reinvestment Act of 2009, has dominated conversation on Capitol Hill and opinion pages nationwide. As legislators juggle our nation’s financial future, most agree the government needs to do something. The question now is: What should it do?

Congress should commit to a stimulus that incorporates aspects of both Democratic and Republican plans. Our sick economy requires an immediate jolt with provisions for long-term recovery.

Economists often say that during a recession, three things should be done to mitigate the crisis: the government should spend money and cut taxes, and the Federal Reserve should cut interest rates. These measures aim to boost consumer demand. As the Federal Reserve has already lowered the federal funds rate to near zero percent, policymakers have only two tools left. Fortunately, they’ve realized this: The Democrats have endorsed a bill that would include roughly $275 billion in tax cuts and $600 billion in spending.

The Democrats plan to spend only about half of that $600 billion on short-term stimulus measures – this is a mistake. Immediate relief should be a higher priority. The $300 billion will take the form of unemployment benefits, food stamps, health care provisions and the like. More money should be spent in this area to shore up budget shortfalls, particularly in public transit.

The other $300 billion in spending is currently slated to go to existing government programs and long-term investment – $27 billion for highway renovation and $12 billion for transit expansion, for example. Those programs will not immediately stimulate the economy; their place in the package should be reconsidered.

The bill’s approach, in its current form, has a creeping protectionism to it. The “Buy American” clause would require all projects invested in by the act to use exclusively American steel and iron. Aside from possibly violating World Trade Organization rules, the clause could motivate other countries to adopt similar policies that would constrain American exports. The Senate has moderated this requirement, but the United States and the world need healthy trade to get out of this mess – any idea that could inhibit trade should be completely abandoned.

The Republicans, on the other hand, favor tax cuts. Their plan, led by Sen. John McCain (R-Ariz.), would include $430 billion in tax cuts and $290 billion in spending. Economists fear that individual tax cuts may do little to bolster demand, because recipients will likely save tax cuts instead of spending the extra money. But there is an important upside to this philosophy: Corporate tax cuts can lower firms’ costs and dissuade them from firing workers.

The Republicans’ plan has shortcomings of its own. On Wednesday, they passed a housing tax relief in the hope of energizing the housing sector, even though an overheated housing sector caused this mess. Now Republicans want to re-inflate the bubble.

Both packages, then, have their advantages and disadvantages. Congress must find the best parts of each and mesh them to form the most effective package possible.

Which approaches will bring the quickest recovery? It’s an empirical question, not an ideological one. Whatever happens over the next few weeks, some stimulus beats no stimulus at all. Washington needs to find its head and lose its ideological chutzpah.

This is our message for Congress and President Obama: Ask the economists, statisticians and industry experts. Ignore the lobbyists, special interests and pork-barrel projects. Vote honestly. You are adding to over a trillion dollars of debt, a debt that our generation will have to account for. Make the most of this opportunity to turn the tide of this recession.

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