Some Obama aides had qualms about proposals

Some Obama aides had qualms about proposals

Posted: Tuesday, January 13, 2009

WASHINGTON - Several proposals in Barack Obama's mammoth economic recovery plan will result in only modest or even uncertain benefits if they become law.

Says who?

A pair of the president-elect's top economic advisers - at least that was their view, in previous roles, before they joined his team. Those assessments, plus recent complaints from Democratic lawmakers, underscore the challenges Obama faces in selling the merits of his nearly $800 billion package of tax cuts and spending initiatives.

He may indeed prevail, especially because critics have not coalesced behind an alternative and the economy is so troubled that many former skeptics now embrace huge efforts, proven or not, to try to fix it.

If nothing else, the comments and articles point to the spotty track record of using government tax-and-spend policies in hopes of preventing or ending recessions.

For example, giving more federal aid to states, one of Obama's proposals, falls in the "medium" range of cost-effectiveness and carries much uncertainty about its impact on the economy, Peter R. Orszag told Congress a year ago. He headed the nonpartisan Congressional Budget Office then, and now is Obama's pick to direct the Office of Budget and Management.

Other Obama proposals such as giving businesses more leeway to write off losses from 2008 and 2009 "have little effect by themselves," Orszag testified at the time. "The historical record on the effectiveness of efforts to provide discretionary fiscal stimulus is mixed," he concluded.

Christina Romer, who will head Obama's Council of Economic Advisers, held a similar view in 1994, when she co-wrote an essay, "What Ends Recessions?"

"Our estimates suggest that fiscal actions," which are what Obama is proposing, "have contributed only moderately to recoveries," she and her husband, David, wrote. "Economists seem strangely unsure about what to tell policy makers to do to end recessions."

Now, 15 years later, Romer is a principal shaper and defender of Obama's strategy. She says plenty of uncertainty remains, and some proposals are more promising than others.

"Tax cuts, especially temporary ones, and fiscal relief to the states are likely to create fewer jobs than direct increases in government purchases," says an analysis of the Obama plan co-written by Romer and released Saturday. But government spending takes time to have an impact, the report says, whereas "tax cuts and state relief can be implemented quickly," and therefore "they are crucial elements of any package aimed at easing economic distress quickly."

The analysis predicts that Obama's plan would create 3.5 million jobs over the next two years.

Under the plan, about $300 billion would go to tax cuts. Hundreds of billions more would go to job-creation efforts including public works, and to investments in green technology, education and other long-term projects.

Many lawmakers have praised the plan's outlines, but some indicate they want changes.

Senate Budget Committee Chairman Kent Conrad, D-N.D., opposes using the plan for permanent spending increases. That puts him at odds with House Democrats who hope to broaden eligibility for unemployment insurance and boost education spending on a long-term basis.

The idea of a $3,000 business tax break for each new job created is drawing particular criticism from lawmakers who call it impractical and subject to abuse.

Some Republican leaders have gone further, attacking the very premise that ramped-up government spending, and the resulting deficits, are justified when the economy is tanking and millions of people are losing their jobs.

"The empirical evidence overwhelmingly rejects federal government deficit-spending as the best method for stimulating the economy," Indiana University economist Justin Ross said in a statement distributed by House Minority Leader John Boehner, R-Ohio.

Obama said Friday he welcomes input from lawmakers of both parties. "If members of Congress have good ideas," he said, "if they can identify a project for me that will create jobs in an efficient way that does not hamper our ability over the long term to get control of our deficit, that is good for the economy, then I'm going to accept it."

Some aspect of his plan seem more likely to help the economy than do others, according to economists and the January 2008 analysis by Orszag, now a chief architect and explainer of Obama's efforts.

Obama wants to give tax credits of $500 a year to individual workers and $1,000 to couples if at least one is employed. Such flat-rate credits give proportionally bigger income boosts to low-wage workers, who are more likely to spend the extra money and spur the economy, whereas wealthier people might simply save it, economists say.

Still, Orszag suggested a year ago, even low-income Americans might hoard their extra dollars and thereby defeat the stimulus plan's purpose. "In a period of high uncertainty," he told Congress, "fiscal stimulus may have a more modest effect because households are reluctant to spend."

"A household's consumption also varies for other reasons that are little understood," Orszag said in his 27-page testimony.

Obama wants to spend as much as $200 billion to help states pay for Medicaid and education. Such efforts can have merit, Orszag testified a year ago. But he warned that if federal aid to states "merely provides fiscal relief by paying for spending that would have occurred anyway," it may provide little or no stimulus to the economy.

Obama proposes to pour billions of dollars into infrastructure and public works projects, including roads and bridges. He favors those that are ready to break ground right away.

Orszag said a year ago, however, "even those that are 'on the shelf' generally cannot be undertaken quickly enough to provide timely stimulus to the economy."

Obama wants the economic package to greatly increase the production of renewable fuels and to make federal buildings more energy efficient. Such efforts would have immediate as well as long-range benefits, Obama says.

Orszag, in early 2008, seemed to think only half of that was true.

Some public works proposals, "such as grant-funded initiatives to develop alternative energy sources are totally impractical for countercyclical policy," he testified, using a term for trying to reverse harmful economic trends promptly.

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