President Bush is wrong again. The White House plan to stimulate the economy is through tax rebates and breaks for businesses. The total boost to the economy is about $145 Billion or roughly 1% of GDP. I’m sure you’ll hear more about it in the State of the Union address on Monday (1-28-08).
Until recently I didn’t really have an idea of an alternative plan. I do understand that job creation and job security promote a confident consumer. A confident consumer buys goods.
Bob Herbert over at the NY Times hit on the job aspect of the economy in an opinion piece on Saturday (1-19-08) called Good Jobs Are Where the Money Is. Mr. Herbert points his readers to the Economic Policy Institute or EPI for more information on his opinion. The EPI published a marvelous plan to stimulate the economy called Strategy For Economic Rebound: Smart Stimulus to Counteract the Economic Slowdown. I agree with about 90% of the paper.
In summary, here is their plan – create jobs!
What the EPI wants is to fill the working void by employing thousands of people related to construction work and craft work (plumbing, painting, carpentry, tiling, and etc). This makes sense for two reasons. The first is the housing slow down has left many construction workers waiting for the next uptick in the housing market. These workers are readily available. The second is that the type of work the EPI envisions for them is infrastructure based. This is where I think the EPI really hits a home run. The US infrastructure is neglected. As I’ve wrote in other posts (Big Prizes, Risk Aversion, and Why No Changes), US businesses are avoiding high risk, high reward projects because of the complication of the infrastructure. Much of what happens now is the repackaging of tried and true ideas. It is only incremental innovation. No leaps. As the EPI writes, an update to the infrastructure of the US, whether it is repairing bridges, utilities, roads, or school projects, serves two ends. It gets many people back to working and it accomplishes work that needs to happen anyway. This will prompt more business development than a tax break.
The one area I wish the EPI focused on was the prodding of innovative business projects. With some of the funding allocated, the US government should provide interest free loans or incentives to businesses that launch green projects within the next six months. There is a backlog of projects ready to go, they just need the funding or the ability to get past the economies of scale barrier. These projects would spur the next wave of productivity in the US. Otherwise we pass this slow period and exit it into… what? What is the next breakthrough?
Here are some stats I pulled from Strategy For Economic Rebound: Smart Stimulus to Counteract the Economic Slowdown :
- The EPI plan is $140 billion of stimulus or 1% of the GDP (less than the President’s plan)
- Unemployment is likely to reach 5.5% by July
- The EPI plan would add between 1.4 and 1.7 million jobs
- Approximately, 10 cents per dollar is spent on imported goods in the US
(this goes against offering just a tax rebate since 10% of every dollar
goes to foreign suppliers)
- While a rate cut would still likely be beneficial, it is unlikely to have the same stimulative impact as in the past.
- Housing prices fell 6.7% on an annual basis and are expected to fall further
- Slack demand caused construction employment to fall by more than 200,000 jobs in 2007
- Eliminating the estate tax and extending the high income, capital gains, and dividend tax cuts beyond 2010 would do nothing for the economy in 2008
- This country has a more unequal distribution of income than any other advanced country
- Estimates by Moody’s Economy.com indicate that each $1 in tax cuts
targeted to low-income households would increase demand by $1.19. In
contrast, tax reductions for capital gains and dividends would yield
just $0.09 per dollar
- In 1999, the National Center of Education Statistics (NCES) put the average age of the main instructional public school building at 40 years
- An industry standard for how much should be spent annually on maintenance and repair is 2% of the building’s replacement value
- The US should be spending approximately $17 billion per year on public
school facility maintenance and repair to catch up with and maintain
its K-12 public education infrastructure repairs
- The U.S. Department of Transportation has identified more than 6,000
high-priority, structurally deficient bridges in the National Highway
System that need to be replaced, at a total cost of about $30 billion.
A relatively small acceleration of existing plans to address this
need—appropriating $5 billion to replace the worst of these dangerous
bridges—could employ 70,000 construction workers, stimulate demand for
steel and other materials, and boost local economies across the nation