As all of us know, the economy's been in a rut for a while, and as I'm sure most of us know, there was a so-called "stimulus package" passed and signed into law earlier this year, to the tune of just less than $800 billion. The problem with it is that there's little actual stimulus. The $787 billion includes, for starters, $288 billion in tax cuts for individuals and businesses. Say what you want about the idea of tax cuts, but expecting tax cuts to serve as quality stimulus is a waste of time.
There's a concept in the economics world known as the multiplier process. Essentially, it's the non-controversial idea that $100 spent by someone purchasing goods gets used several times as that business pays their supplier, who pays creditors and employees, who purchase goods, etc. The higher the multiplier, the more bang for the buck.
Mark Zandi, a professional economist who advised John McCain during the 2008 election, published a report that included the multiplier values of several different spending programs. The least stimulative were most tax cuts, which bring in between 30 and 38 cents for every dollar spent. This is 36 percent of the entire stimulus package.
The most stimulative? In order, a temporary increase in food stamps, an extension of unemployment benefits and infrastructure spending, all of which bring in over $1.50 per dollar spent. Sadly, the total amount of funding for infrastructure and aid to low-income workers and the unemployed comes in at just over $130 billion, or about 17 percent of the total package.
This isn't hard. The idea behind stimulus is to stimulate - to stop or reverse the economic free fall. Yet the package itself is woefully inadequate, not only because of the substance but because of the size. Economics experts, from Nobel laureate Paul Krugman on the left side of the political spectrum to former Ronald Reagan advisor Martin Feldstein on the right, have called the stimulus package too small and weak to do the job it was meant to do.
Dean Baker of the Center for Economic and Policy Research lamented when the bill was passed that the economy is losing over $1 trillion in housing wealth, real estate value and consumer spending per year. Yet, the package is designed to release not even $800 billion of weak stimulus over two years. Basic math says it just doesn't add up.
Therefore, another round of stimulus is necessary, but it needs to be structured much better than the first. Scrap the ineffective tax cuts. When in hard times, consumers save more than in normal times, and tax cuts go mostly into bank accounts and not into the economy, which explains the low multiplier values. Instead, tailor it around four items.
First, increase infrastructure spending on roads and bridges. It puts people to work, puts money in their pockets and leaves behind a product we can use at a later time.
Second, extend unemployment benefits, food stamps and other aid to low-income workers. The reason they're so effective is because the people who receive them are in dire financial shape, and can't afford to save as much as someone who is wealthier. Thus, more of their income circulates back into the economy.
Third, more aid should be allocated to states. This would enable them to continue to provide services such as Medicaid and education funding.
And finally, pass some student aid. Pell Grants received an abysmal $15 billion in the first package. Giving more students the chance to obtain a better education not only prepares them for the future, it temporarily takes them out of the job market so more jobs can go to those already unemployed. In a time of 10 percent unemployment, this is an absolute necessity.
Some might say we shouldn't do this because we have a massive debt already, and yes, it is massive. But rest assured; it's not as bad as it looks. So, Congress: Spray the money hose again.
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