Outside editorial: Economic stimulus: How much of a good thing?

Posted: Wednesday, January 14, 2009

President-elect Barack Obama's speech Thursday promoting a massive economic recovery plan was bracketed by two statistics that show the difficult balancing act confronting him.

The day before Obama's speech, the nonpartisan Congressional Budget Office said the federal deficit will grow this year to a shocking $1.2 trillion. That will be the worst budget hole since World War II, calculated as a percentage of the overall economy.

And the day after Obama's speech, the federal government announced the unemployment rate for December rose to 7.2 percent, the highest in 16 years. About 2.6 million workers lost their jobs in 2008.

It's clear that the worst recession in decades is deepening as Obama prepares to take the oath of office Jan. 20. The challenge facing Obama and Congress is to approve a recovery plan big enough to turn around the economy but one that doesn't burden taxpayers with more debt than is necessary.

The staggering national debt of $10.6 trillion has nearly doubled in the last eight years; the stimulus proposal under consideration is believed to cost $775 billion over two years.

Obama showed that he understands what's at stake, noting that inaction could lead to double-digit unemployment and years of recession. He's correct in saying that only spending by the federal government can take place on a scale large enough and rapid enough to blunt such a prolonged downturn.

States have hundreds of billions of dollars worth of "shovel-ready" projects awaiting funding, to repair bridges and mass transit, pave new roads, and rebuild schools. And spending on public infrastructure is one of the most effective ways to jump-start the economy.

Not only will these projects provide jobs, they're an investment in a more efficient marketplace.

Building the framework of a "21st-century economy" in a few weeks is a tall order, but many of Obama's longer-range proposals make sense, too. For example, computerizing all medical records, bringing all classrooms into the digital age and investing in renewable energy will boost America's competitive edge. This crisis is also an opportunity for fundamental transformation.

In recent days, Obama also has promoted tax cuts for workers and corporations, which would account for 40 percent of the recovery plan. He would give families a cut in payroll taxes of up to $1,000 per year but wants to make this provision permanent. Given government's record-setting red ink, a temporary tax break seems more responsible.

Obama wants to offer companies a $3,000 tax credit for each job created, but that incentive could be hard to police. If a company first cuts 100 jobs and then "adds" 50, it shouldn't qualify for tax breaks.

Another provision, to allow corporations to increase their tax write-offs for losses, could free up resources for expansion. However, there needs to be a way to limit the potentially enormous cost to the Treasury. And why should some Wall Street firms, which have already bellied up to the taxpayer trough, get another bonus from the IRS?

Congress must strike the right balance between business incentives and aid to individuals - unemployment benefits, food stamps, health-care assistance - which is more likely to be returned directly into the economy. But lawmakers should make measures temporary, instead of turning a short-term recovery into costlier long-term entitlements.

Social Security and Medicare weren't mentioned in Obama's speech Thursday, which is understandable. He's talked earlier about trimming entitlement costs, but that thorny challenge is too important to share the stage with this urgently needed rescue package.

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