“Teach America: Government can work”

Economists Jeff Madrick, Dean Baker and James Hamilton talk about how President-elect Obama should proceed with his stimulus plan.

Topics: U.S. Economy, Barack Obama

"Teach America: Government can work"

Jeff Madrick, director of policy research, Schwartz Center for Economic Policy Analysis, The New School.

Infrastructure and green investment should be a central part of the Obama stimulus program. It will provide early spending to raise the nation’s demand in a time when that is being undermined by lost jobs, more savings by consumers, and the famed wealth effect that reduces consumption with the loss of more than ten trillion dollars in wealth in houses and stocks. It will also create good domestic jobs and improve the long-term productivity of the economy. This is a triple play.

But it is most important that these efforts be coordinated both regionally and nationally. Infrastructure is by and large run by state and local governments, whose tills put up most of the money. The federal government is critical but not the main player. What complicates matters is that transportation and energy infrastructure usually affects at minimum a region, not just a city or state.

The academic research on balance shows positive returns to infrastructure investment, but not overwhelming returns. Why is that? I think it is because infrastructure spending has been so badly planned for years. It is a hodgepodge of well-meaning and often not so well-meaning efforts, mostly dominated by highways and uncoordinated with energy, housing and city planning. Just because localities have projects ready to start right away is not adequate justification for the federal government to supply funding for them. Yet too many lawmakers, including progressive ones, have encouraged us to do this.

In coordinating infrastructure across regions and the nation in general, America needs a new philosophy that raises to a priority both economic and energy efficiency. Simply building more and better roads to the exurbs is not the right approach. I believe this avenue to America’s future — the analogy of the Eisenhower interstate highway system — is a dead end.

We now must reduce our commuting and driving time. This means mass transit and different kinds of housing subsidies. We must make our new communities energy effective by building energy-efficient buildings and changing over those we now have. We must invest in new technologies.

Overall, this will require agglomerating America, for lack of a better way of putting it. The great American desire to locate farther away from metropolitan areas should be discouraged by federal policy, the desire to live closer to an urban area encouraged.



It is imperative to organize and coordinate infrastructure and energy investment, not to finance it piecemeal. My personal dream is to merge the departments of energy and transportation, and incorporate some duties of HUD.

It is also imperative for Obama to teach America that government can work, or the benefits of his election will have been wasted. Stepping back and coordinating under a true, well-conceived national policy is a way to do that.

Dean Baker, co-director, Center for Economic and Policy Research

First, it is important to recognize that the economy needs a very large stimulus, probably on the order of $500 to $600 billion a year over the next two years. Therefore, we can and must think big.

Effective stimulus must be spent quickly. It should help to ameliorate the pain of the downturn, and ideally have lasting benefits for the economy. Aid to state and local governments figures prominently in the spend quickly and ameliorate the pain categories. These governments are laying off workers and making cuts in needed services because the recession has led to plunging revenues. Large-scale revenue sharing can prevent these cuts, which would be a serious drag on the economy.

There are also categories of transfer payments, such as extended unemployment insurance benefits and increased funding for food stamps and energy assistance, that are also effective stimulus. This money will be quickly spent, boosting demand in the economy.

President Obama can also use the stimulus to jump-start healthcare reform. Coverage can initially be extended through a system of generous tax credits for employers who extend coverage to previously uncovered workers. Employers who already provide coverage can be given incentives to make their coverage more generous. Over time the subsidies can be restructured as the income-based subsidies in the plan that Obama proposed during his campaign.

As part of this plan, Obama should open up the Medicare system to all workers and employers. This public sector plan, coupled with rules prohibiting discrimination based on pre-existing conditions, will ensure that everyone will have access to a good healthcare plan. It also provides an effective mechanism for cost control.

Spending on infrastructure should consider both the extent to which it can be carried through quickly and also its long-term benefits. There are a number of maintenance and repair projects to the infrastructure, such as repaving roads, replacing school roofs, and strengthening bridges, that can be done quickly and would have to be done in any case. These should be given priority.

There are also a wide range of green infrastructure projects, such as retrofitting buildings and improving mass transit systems (e.g., increasing bus routes and adding light rail cars) that can be done reasonably quickly and will do much to reduce energy use. These projects should also be given a very high priority.

While this list of items is long and expensive, right now, we have the money.

One item that should not be on the list is tax cuts for businesses. Business tax cuts may improve corporate balance sheets, but will do little to boost the economy. Firms will not invest just because we give them more money.

In particular, a proposal being floated that would allow firms to take write-downs against taxes paid four to five years ago is especially pernicious. This proposal would primarily help the financial and building industries, since they both have extraordinarily large losses. There can be little justification for giving a special tax break for the businesses, and their executives, who are most responsible for the nation’s economic crisis.

James Hamilton, professor of economics, University of California at San Diego

The first goal we must keep in mind is preserving flexibility. The U.S. faces very daunting long-run challenges in terms of the federal deficit, and these could easily turn into a serious immediate problem if we were to see a sudden shift in foreign demand for U.S. assets. I would not want to see us begin “temporary” stimulus efforts which we lack the political will to undo once they’re put in place.

Moreover, to be effective, quick action is called for. Grandiose new federal programs necessarily involve a long start-up process, which I do not believe we can afford.

The final core principle should be to prevent further economic damage. State and local governments may significantly contract spending as they try to stay within their budgets because they lack the flexibility for deficit spending that is available at the federal level.

Nor should we suppose that additional federal spending is the ideal response to a cut in state and local spending. If federal spending increases by the same amount that state and local spending decreases, it is not a pure wash as far as the economy is concerned, because productive resources can not reallocate frictionlessly, and there are multiplier consequences from the local layoffs.

For these reasons, my preferred fiscal stimulus would take the form of temporary unrestricted block grants to state and local governments.

Dean Baker is a co-director of the Center for Economic and Policy Research in Washington, D.C.

Jeff Madrick is an economist and author "The End of Affluence."

More Related Stories

Featured Slide Shows

  • Share on Twitter
  • Share on Facebook
  • 1 of 7
  • Close
  • Fullscreen
  • Thumbnails
    AP/Jae C. Hong

    Your summer in extreme weather

    California drought

    Since May, California has faced a historic drought, resulting in the loss of 63 trillion gallons of water. 95.4 percent of the state is now experiencing "severe" drought conditions, which is only a marginal improvement from 97.5 percent last week.

    A recent study published in the journal Science found that the Earth has actually risen about 0.16 inches in the past 18 months because of the extreme loss of groundwater. The drought is particularly devastating for California's enormous agriculture industry and will cost the state $2.2 billion this year, cutting over 17,000 jobs in the process.

       

    Meteorologists blame the drought on a large zone (almost 4 miles high and 2,000 miles long) of high pressure in the atmosphere off the West Coast which blocks Pacific winter storms from reaching land. High pressure zones come and go, but this one has been stationary since December 2012.

    Darin Epperly

    Your summer in extreme weather

    Great Plains tornadoes

    From June 16-18 this year, the Midwest was slammed by a series of four tornadoes, all ranking as category EF4--meaning the winds reached up to 200 miles per hour. An unlucky town called Pilger in Nebraska was hit especially hard, suffering through twin tornadoes, an extreme event that may only occur every few decades. The two that swept through the town killed two people, injured 16 and demolished as many as 50 homes.   

    "It was terribly wide," local resident Marianne Pesotta said to CNN affiliate KETV-TV. "I drove east [to escape]. I could see how bad it was. I had to get out of there."   

    But atmospheric scientist Jeff Weber cautions against connecting these events with climate change. "This is not a climate signal," he said in an interview with NBC News. "This is a meteorological signal."

    AP/Detroit News, David Coates

    Your summer in extreme weather

    Michigan flooding

    On Aug. 11, Detroit's wettest day in 89 years -- with rainfall at 4.57 inches -- resulted in the flooding of at least five major freeways, leading to three deaths, more than 1,000 cars being abandoned on the road and thousands of ruined basements. Gov. Rick Snyder declared it a disaster. It took officials two full days to clear the roads. Weeks later, FEMA is finally set to begin assessing damage.   

    Heavy rainfall events are becoming more and more common, and some scientists have attributed the trend to climate change, since the atmosphere can hold more moisture at higher temperatures. Mashable's Andrew Freedman wrote on the increasing incidence of this type of weather: "This means that storms, from localized thunderstorms to massive hurricanes, have more energy to work with, and are able to wring out greater amounts of rain or snow in heavy bursts. In general, more precipitation is now coming in shorter, heavier bursts compared to a few decades ago, and this is putting strain on urban infrastructure such as sewer systems that are unable to handle such sudden influxes of water."

    AP/The Fresno Bee, Eric Paul Zamora

    Your summer in extreme weather

    Yosemite wildfires

    An extreme wildfire burning near Yosemite National Park forced authorities to evacuate 13,000 nearby residents, while the Madera County sheriff declared a local emergency. The summer has been marked by several wildfires due to California's extreme drought, which causes vegetation to become perfect kindling.   

    Surprisingly, however, firefighters have done an admirable job containing the blazes. According to the L.A. Times, firefighters with the state's Department of Forestry and Fire Protection have fought over 4,000 fires so far in 2014 -- an increase of over 500 fires from the same time in 2013.

    Reuters/Eugene Tanner

    Your summer in extreme weather

    Hawaii hurricanes

    Hurricane Iselle was set to be the first hurricane to make landfall in Hawaii in 22 years. It was downgraded to a tropical storm and didn't end up being nearly as disastrous as it could have been, but it still managed to essentially shut down the entire state for a day, as businesses and residents hunkered down in preparation, with many boarding up their windows to guard against strong gusts. The storm resulted in downed trees, 21,000 people out of power and a number of damaged homes.

    Debbie Arita, a local from the Big Island described her experience: "We could hear the wind howling through the doors. The light poles in the parking lot were bobbing up and down with all the wind and rain."

    Reuters/NASA

    Your summer in extreme weather

    Florida red tide

    A major red tide bloom can reach more than 100 miles along the coast and around 30 miles offshore. Although you can't really see it in the above photo, the effects are devastating for wildlife. This summer, Florida was hit by an enormous, lingering red tide, also known as a harmful algae bloom (HAB), which occurs when algae grow out of control. HABs are toxic to fish, crabs, octopuses and other sea creatures, and this one resulted in the death of thousands of fish. When the HAB gets close enough to shore, it can also have an effect on air quality, making it harder for people to breathe.   

    The HAB is currently closest to land near Pinellas County in the Gulf of Mexico, where it is 5-10 miles offshore.

  • Recent Slide Shows

Comments

0 Comments

Comment Preview

Your name will appear as username ( settings | log out )

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>