America’s New Stimulus Package

The stimulus package is likely to help companies like Emerson Electric (EMR), General Electric (GE), Jacobs Engineering (JEC), Chicago Bridge & Iron (CBI) and Caterpillar (CAT).

We now have a rough outline of what the economic stimulus package will look at.  The total size is set at $825 billion.  In general I like the plan, with the exception of the tax loss carry backs, but I wonder if it will be enough to dig us out of this gigantic economic hole we are in.

Parts of it seem like an air bag in a car, the vehicle might still be a wreck, but at least the passengers will walk away with only minor injuries. Much of the spending would make sense even if we were not in a recession.

Here are the key components, along with my thoughts on each (or at least most) of them.

Tax Cuts - $275 Billion:

Cutting payroll taxes by $500 per individual and $1,000 per family. Not the best bang for the buck, since much of it may be used to pay down debt or otherwise be saved. However it seems like a good idea in any case.

Restoring the balance sheet of the household sector, particularly of the lower and middle parts of the income spectrum would be a very good thing for the economy in the long run. In their role as taxpayers, individuals would be taking on debt at about 3% or less, and in their role as consumers might be paying down debt with rates as high as 18% if they pay down credit cards. Nice interest rate arbitrage there.

The package also includes tax loss carry backs of 5 years instead of the usual two for corporations. This looks like a total waste of money to me. The biggest beneficiaries would be banks and homebuilders.

We are doing lots already to help the banks, and honestly the economy needs to see most of the big homebuilders go out of business so excess inventories can be worked off. Accelerated depreciation or greater expensing of capital assets would be a better way to aid businesses and stimulate the economy. To my mind, this is the weakest part of the whole package.

Aid to States - $119 Billion:

The biggest part of this is to help states pay for Medicaid at $87 billion. There is also $25 billion targeted to help maintain public safety and other critical services, and $7 billion directly targeted to help keep law enforcement going.

States are generally prohibited by their constitutions from running deficits (although they have been able to find ways around that in the past) and have seen two of their biggest revenue sources dry up, sales taxes and property taxes. Without aid they would have to dramatically cut back on services, laying off many state workers and adding to the unemployment roles.

In some states like California, the projected deficits are so deep that the hole could not be filled even by cutting more than 75% of employees. I’m not sure how safe the remaining prison guards would feel if three out of four of their co-workers were laid off.

The $119 figure is not enough to fill the hole, and states will still have to make cuts, but at least they can be a bit more selective about it.

Education - $117 Billion:

This includes $41 billion to local school districts, targeted at low income areas or that have heavy loads of special education students. An additional $39 billion will go to other school districts as well as public universities.

School districts are generally dependent on property tax revenues and have been very hard hit by the downturn in the housing market. This will prevent masses of school teachers from being laid off.

Some of this money will also go into construction projects. There is also $15 billion to states for meeting some key performance measures, although I have not seen what those measures are, and also $22 billion aimed at higher education, including increasing Pell Grants.

While many will argue that local public schools are not always the most efficient places, allowing our schools to be hard hit by the economic downturn is not a recipe for long-term economic health. Also, it’s not like that 13-year-old can just come back and take the seventh grade over again when the economy improves.

Aid to Those Hit Hardest - $106 Billion:

This includes $43 billion for extended unemployment benefits, $39 billion to help those laid off keep their COBRA health benefits, $20 billion to increase food stamps and $4 billion to increase some social security benefits.

These sorts of expenditures are among the ones with the most “bang for the buck” in terms of stimulating the economy. People who are really on the ropes financially are likely to spend the money quickly, which will increase the number of jobs in the economy.

Most econometric studies have found that these sorts of expenditures result in more than $1.50 of economic activity for every $1.00 spent. This is in addition to the obvious humanitarian benefits.

Infrastructure - $90 Billion:

Including $30 billion for Roads and Bridges, $31 billion to upgrade federal buildings (especially to make them more energy efficient), $19 billion for water and environmental projects and $10 billion for public transit.

This sort of spending does double-duty. It stimulates the economy now and it leaves lasting economic assets. The problem is it often takes too long to get the projects up and running to help immediately.

However, this economic downturn is likely to last a long time. I think those hoping for a second-half recovery this year are fooling themselves.

Our infrastructure is badly decayed, and this sort of expenditure would be justified even if the economy were just fine and dandy. In some cases, the return on this sort of investment comes from what doesn’t happen. Think about what the ROI of a few hundred million spent in 2002 or 2003 upgrading the levies in New Orleans would have been, even if it never showed up in any economic report.

I am disappointed that there is not more spending in this area.

Energy - $54 Billion:

This includes $32 billion to rebuild and modernize the electrical grid, which is vital if we are going to move in the direction of alternative energy like wind and solar.

There is lots of potential for building wind farms in North Dakota, but not that much need for all that electricity in North Dakota — it needs to get to the Twin Cities and Chicago. Lots of potential for solar in Arizona, but the electricity needs to get to L.A.

In addition, a smart grid would make blackouts less common, and would lessen the need to build new baseline power plants and allow the existing plants to run closer to full capacity all the time.

The rest of the energy investments ($22 Billion) would go to weatherize and insulate public housing. Conservation is generally among the cheapest sources of “new” energy production.

Science - $16 Billion:

$10 billion to fund more scientific research and upgrade research facilities. The return on such investments long term is by its nature uncertain, but often huge. In the meantime, it does stimulate the economy just like any other building project would.

There is also $6 billion set aside to provide broadband internet services to rural areas, sort of like a 21st-century version of FDR’s rural electrification efforts.

Other - $48 Billion:

Not really specified, so I don’t have anything to add here.

Overall, my biggest question is: “Is it enough?” This economy is falling into a very deep hole, with both the consumer and business investment slowing very sharply.

World trade is in the process of collapsing, so it is unrealistic to expect an export boom to fill the gap. Yes, imports are falling, but it appears to be more a case of falling consumer demand rather than lots of import substitution.

Government stimulus spending is really the only way to try and stabilize the economy. The spending is over two years, so $412.5 billion per year. That works out to be about 2.5% of GDP.

The economy is most likely going to be running at least 8% below its potential. As big as the numbers sound, this program is only likely to cushion the blow and slow the decline, not result in a fully healthy economy.

However, there do appear to be some clear potential winners here (or at least relative to what they would be going through without this package). The energy projects would be very good for electrical firms like Emerson Electric and General Electric, and the Infrastructure projects will help engineering and construction firms like Jacobs Engineering and Chicago Bridge & Iron along with heavy equipment firms like Caterpillar.

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Comment by cheryl

2009-02-17 15:34:52

i do not like this. i am going to get 13 dollars a week but raise my payroll tax by 3x’s the amount?

awful.

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