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Friday, February 13, 2009

The Science of Suboptimization, the Art of the Possible

On Jan. 29, the House passed a $819 stimulus plan without a single Republican vote. The Senate passed its own version that would cost $838 billion. However, the compromise slashed important provisions from the House version -- including the elimination of $16 billion in funds for new school construction -- while adding tax credits that skewed toward the wealthy. A Center for American Progress analysis found that it would have created 9 to 12 percent fewer jobs than the House plan, even while costing $16 billion more. The House and Senate ironed out differences in the bill to approve a $789 billion package. The bill followed remarkably closely to the broad outline that Obama had painted more than a month ago.

Obama stumped for the bill with the support of elegant progressives. "This is the most dangerous economic crisis since the Great Depression, and it could all too easily turn into a prolonged slump, The American economy is on the edge of catastrophe." Nobel-prize-winning economist Paul Krugman warned last month.

According to the Progressive (2/12/09), the compromise improves many aspects of the version passed in the Senate, particularly by expanding of "federal aid to an array of programs aimed at the poor and jobless, with billions of dollars for health care, unemployment insurance, food stamps and other programs." The bill extends federal unemployment benefits to 20 weeks, "with an additional 13 weeks for jobless in states with particularly high unemployment," and raises weekly payments by $25. After food stamp funding that passed the House was slashed in the Senate version, the compromise grants $20 billion in food stamp benefits. Nearly $46 billion will fund education and modernize schools, "considerably higher than the Senate's $39 billion total but far less than the House's $95 billion." The bill also allocates $30 billion for smart grid technology, advanced batteries, and energy efficiency measures, along with $5 billion for home weatherization and $4.5 billion to make federal buildings more energy efficient -- closer to the House version. The compromise also "drastically reduced" the Senate's $15,000 tax credit for new home buyers, "placing income limits on who could benefit and reducing the overall cost from $35 billion to about $5 billion." Krugman derided the tax credit as a "bonus to affluent people who flip their houses" and concluded that it would have "cost a lot of money while doing nothing to help the economy." The compromise "all but eliminated" a big business giveaway that would have allowed money-losing companies to claim an estimated $67.5 billion in tax refunds this year and next -- a tax cut with the least stimulative impact per dollar, according to the Congressional Budget Office.

The bill is an improvement over the Senate version, but it is too small and still includes non-stimulative tax breaks. The spending in the bill, the most stimulative component, fell from $604 billion as introduced in the House to only $513 billion in spending, with $276 billion in tax breaks. Some of these tax breaks, such as the credit for new home buyers, are particularly non-stimulative, the largest being the $70 billion tax break to spare millions of Americans from paying the alternative minimum tax. "It has nothing to do with stimulus or with recovery," said Sen. Tom Harkin (D-IA). I am not happy with it." The compromise slashes aid to states to $44 billion, from the House's $80 billion, With the massive budget shortfalls states are facing -- California alone faces a nearly $40 billion budget gap over the next two years -- the state aid will be unable to prevent severe cuts in state programs and will lead to cuts in jobs. Congressional Black Caucus leaders also objected to the elimination of $4.2 billion in neighborhood stabilization funding removed by the Senate and asked for funding to provide broadband Internet access to poor communities and to create more job training programs.

With politics the art of the possible and with a a talented, but fledgling President on his maiden legislative voyage across a vast fiscal and monetary expanse, the possible was likly to be disappointing at the outset and in the end.

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