'Are These Folks Serious?'

Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers

The Progress Report

February 6, 2009

ECONOMY

'Are These Folks Serious?'

Yesterday, President Obama strongly condemned members of both political parties for characterizing the economic recovery package before Congress as a "pork" spending plan for pet projects: "[W]hen you hear these attacks deriding something of such obvious importance as this, you have to ask yourself, 'Are these folks serious?'" Despite the loss of 600,000 jobs last month alone, debate over the American Recovery and Reinvestment Act of 2009 has been reduced to petty bickering over extremely small portions of the overall recovery plan. Marching to Rush Limbaugh's drumbeat, conservatives spent all week on cable news caricaturing tiny portions of the bill -- including provisions that they had previously supported -- in order to score political points and embarrass the Obama administration. But these antics have distracted Washington from "the reality that we may well be falling into an economic abyss." Today, The Progress Report takes a step back and looks at the key principles that should guide the construction of any compromise on the economic recovery package.

IT SHOULD BE IMMEDIATE: In recent days, congressional conservatives have expressed a desire to slow down deliberation over the economic recovery plan. But as National Economic Council Director Larry Summers reiterated yesterday, "We do not have time to wait." He called comprehensive and immediate economic recovery legislation "imperative for our economic security." Evidence of the need for immediate action is clear. Today, the Labor Department reported that the U.S. economy lost 598,000 jobs in January alone, raising the unemployment rate to 7.6 percent. Yesterday, the Labor Department reported that 626,000 Americans applied for unemployment benefits for the first time last week, a 26-year high. These grim reports add to the 2.6 million jobs lost in 2008, 59 percent of which occurred in the last quarter of 2008 alone. And the rate at which job losses are increasing is reaching historic highs. Indeed, in the first 12 months of the current recession, unemployment rose by 2.6 percent -- "the fastest such increase since the recession that started in January 1970." The effects of these increasing job losses can be seen rippling through the economy in the form of increasing credit card default rates, record decreases in the value of homes, and near record high levels of household debt.

IT SHOULD BE BIG: Last weekend, Sen. Jim DeMint (R-SC) explained his opposition to the current recovery proposal by complaining, "[T]his is the largest spending bill in history." Congressional Republicans made similar complaints again and again throughout this week, but such rhetoric reveals an obvious ignorance of economic policy. Indeed, the size of the spending bill is not arbitrary, but rather is based on the current and expected gap between the nation's economic capacity and its actual economic output. As the Center for American Progress explained, "We are now in a situation where the private sector is unable -- or unwilling -- to use all of the available productive capacity: able people aren't working, machines sit idle, and cubicles stand empty." As a result, there are "millions of families who are cutting back due to layoffs, fear of layoffs, lower home values, or reduced retirement savings," and "demand for goods and services in the entire economy falls." As demand falls, companies are forced to cut back production and employment further, causing additional decreases in demand. Nobel Laureate Paul Krugman explains that economists generally find that every "excess point" of unemployment above the rate that is expected in a healthy economy leads to 2 percent gap between the nation's actual economic output and its potential economic output. To prevent this gap from increasing indefinitely, the government must step in to temporarily increase demand and close the nation's economic output gap. Because unemployment is so high and demand continues to spiral downward, the current package before Congress -- if anything -- is too small.

IT SHOULD LAY THE FOUNDATION FOR LONG-TERM GROWTH: Conservative policymakers and uninformed members of the traditional media suggest that the current economic recovery package is not "stimulative" because it includes spending on public welfare programs that have both short-term and long-term benefits. They argue that relying on tax cuts would provide fast-acting and long-lasting stimulative effects. In reality, tax cuts are less stimulative than public spending. Further, cutting taxes -- unlike spending on social programs -- permanently increases the budget deficit. Instead, and as the current recovery package is slated to do, investment in America's future energy, health care, and education infrastructure puts Americans to work now and yields economic, environmental, and social benefits for years to come. While conservatives characterize the effects of such spending as being "too slow," the current proposal is designed to be fast-acting, but also maintain large (and needed) stimulative benefits through 2010. Unfortunately, a group of moderate senators, led by Sens. Ben Nelson (D-NE) and Susan Collins (R-ME), aim to cut at least $80 billion from the the recovery package with large cuts to science, agriculture, energy, and education. 

Copyright 2009 ThinkProgress