One Trillion Dollar Deal

JAN 18 - One. Trillion. Dollars. That’s how much money Barack Obama says is needed to kick-start the economy. How he spends it could determine the fate of his presidency.

John Maynard Keynes, the trendiest dead economist of this apocalyptic moment, was the godfather of government stimulus. Keynes had the radical idea that throwing money at recessions through aggressive deficit spending would resuscitate flatlined economies – and he wasn’t too particular about where the money was thrown. In the depths of the

Depression, he suggested that the Treasury could “fill old bottles with banknotes, bury them at suitable depths in disused coal mines” then sit back and watch a money-mining boom create jobs and prosperity.

“It would, indeed, be more sensible to build houses and the like,” he wrote, but “the above would be better than nothing.”

As President-elect Barack Obama prepares to throw money at the current downturn – a stimulus package starting at about $800 billion, plus the second $350 billion chunk of the financial bailout – we all really do seem to be Keynesians now. Just about every expert agrees that pumping $1 trillion into a moribund economy will rev up the ethereal goods-and-services engine that Keynes called “aggregate demand” and stimulate at least some short-term activity, even if it is all wasted on money pits.

But Keynes was also right that there would be more sensible ways to spend it. There would also be less sensible ways to spend it.

A trillion dollars’ worth of bad ideas – sprawl-inducing highways and bridges to nowhere, ethanol plants and pipelines that accelerate global warming, tax breaks for over-leveraged McMansion builders and burdensome new long-term federal entitlements – would be worse than mere waste. It would be smarter to buy every American an iPod, a set of Ginsu knives and 600 Subway foot-longs.

It would be smarter still to throw all that money at things we need to do anyway, which is the goal of Obama’s upcoming American Recovery and Reinvestment Plan.

It will include a mix of tax cuts, aid to beleaguered state and local governments, and spending to address needs ranging from food stamps to computerised health records to bridge repairs to broadband networks to energy-efficiency retrofits, all designed to save or create 3 million to 4 million jobs by the end of 2010.

Obama has said speed is his top priority because the faster Washington injects cash into the financial bloodstream, the better it stands to help avert a multi-year slump with double-digit unemployment and deflation.

But he also wants to use the stimulus to advance his long-term priorities: reducing energy use and carbon emissions, cutting middle-class taxes, upgrading neglected infrastructure, reining in health-care costs and eventually reducing the budget deficits that exploded under George W. Bush.

Obama’s goal is to exploit this crisis in the best sense of the word, to start pursuing his vision of a greener, fairer, more competitive, more sustainable economy.

Unfortunately, while 21st century Washington has demonstrated an impressive ability to spend money quickly, it has yet to prove that it can spend money wisely. And the chum of a 1 with 12 zeros is already creating a feeding frenzy for the ages.

Lobbyists for shoe companies, zoos, catfish farmers, mall owners, airlines, public broadcasters, car dealers and everyone else who can afford their retainers are lining up for a piece of the stimulus. States that embarked on raucous spending and tax-cutting sprees when they were flush are begging for bailouts now that they’re broke.

And politicians are dusting off their unfunded mobster museums, waterslides and other pet projects for rebranding as shovel-ready infrastructure investments.

As Obama’s aides scramble to assemble something effective and transformative as well as politically achievable, they acknowledge the tension between his desires for speed and reform.

“We’re living that tension every day,” an adviser tells TIME.

In this four-alarm economic emergency (nearly 2 million jobs have vanished in four months), it’s easy to forget that shovel-ready doesn’t necessarily mean shovel-worthy. Many projects are shovel-ready now only because they failed to clear the spectacularly low bar Congress set for pork in the past.

Even if we’re freaking out about today – and we should be – we can’t afford to leverage tomorrow to build the infrastructure equivalent of buried banknotes, not when the deficit is a record $1.2 trillion and the debt a staggering $10.6 trillion.

A depression would make both problems worse – tax revenues plunge when incomes plunge – but every public dollar we spend on depression avoidance also plunges us deeper into our hole.

It’s a bit galling to hear Republican leaders warn that Obama wants to spend money borrowed from our children when their own appetite for pork and tax breaks helped double the debt during the Bush years, but their hypocrisy does not make them wrong. If we’re going to spring for another trillion, we need real returns on our investment.

That will require more than speedy spending. It will require a quick overhaul of Washington’s spending priorities and spending processes. In other words, speedy reform.


Not just a deal – a New Deal

Obama hasn’t yet released details of his plan, so the debate has so far focused on the overall dollar amount (liberals want more, conservatives less) and general makeup (liberals want fewer tax cuts, conservatives more) rather than specific strategies for priming the pump.

But the clichés are true: God – or the devil – will be in the details.

For example, if you want to upgrade infrastructure, there’s a big difference between fixing and building. When you fix a road, the dollars you spend reduce your need for future road repairs. When you build a road, you increase your need for future road repairs. Repairs are also quicker to get moving than new construction, and the Federal Highway Administration has calculated that repairs create 9% more jobs per dollar spent.

And while repairs eliminate potholes and other problems that cost motorists time and money, new construction tends to produce rural or exurban sprawl roads that promote speculative development, overstretch municipal services, lengthen commutes and increase gasoline consumption and emissions.

Of course, bike lanes, electric buses and light-rail extensions are even more efficient than road repairs when it comes to fighting global warming, volatile gas prices and our addiction to foreign oil; transit projects also create 9% more jobs.

Then again, transit projects like high-speed rail lines and subway stations tend to take more time to build than roads or repairs.

And while a recent study calculated that the average dollar spent on infrastructure ricochets into $1.59 worth of short-term growth – a bit better than aid to states or broad-based tax cuts and a lot better than tax cuts for businesses or investors – increasing food-stamp or unemployment benefits packs even more bang for the buck.

The point is, specifics really matter. And when specifics get left to Congress and the states, they tend to get screwed up. Politicians love to cut ribbons for new roads; repairs don’t have the same bringing-home-the-bacon oomph.

Most state transportation departments have become virtual asphalt factories, and most states have laws preventing the use of federal transportation dollars for anything but roads.

Yet Congress keeps writing the states blank checks, lavishing the most cash on the ones

that do the most driving and paving, actually mandating that federal officials “shall in no way infringe on the sovereign rights of the states to determine which projects shall be federally financed.” It’s our money, their choices.

The result is that Congress does a terrific job of spreading dollars around the country like peanut butter but a lousy job of identifying or promoting national priorities.

“There’s no performance measures, no environmental or economic analysis,” says the Brookings Institution’s Robert Puentes. “It’s just about dividing up the spoils.”

That’s one reason our critical infrastructure is in such critical condition. It’s crazy to pretend that all airports are equally deserving of renovation funds when New York City and Chicago have the worst bottlenecks.

We shouldn’t even think about new bridges in rural Alaska or rural anywhere when a quarter of our existing bridges are structurally deficient.

Before Hurricane Katrina, the Army Corps of Engineers spent more money in Louisiana than in any other state – most of it on useless and destructive navigation projects with influential godfathers in Congress – but it never completed those levees around New Orleans. Now the stimulus could include forward-looking efforts to help rebuild the city’s natural and man-made defences – or more-of-the-same projects that would increase the risk of another expensive as well as tragic catastrophe. It will depend on who is calling the shots.

Obama cannot expect to handpick every item that ends up in the stimulus. Even the New Deal required a deal. But the New Deal was also new. And it’s folly to expect the same dysfunctional spending habits that got us into this mess to get us out of it.


The Way Out

It’s not that speed and size aren’t important. We’re in a death spiral: businesses are shedding workers at a record pace, which saps consumer spending, which leads to more layoffs, and so on. The public sector needs to get an awful lot of unemployed workers and equipment back to work ASAP.

As Christina Romer, an expert on the Depression who will chair Obama’s Council of Economic Advisers, warns in a new YouTube video, we can’t “let that vicious cycle go all the way to the nightmare scenario.”

In fact, many Keynesian liberals have been dismissing the Obama proposal as overly timid, and Obama has suggested it could grow.

But it’s hard to spend a trillion dollars in a hurry if you don’t want to buy stupid stuff. “We keep hearing we need to spend more. On what?” a transition aide asked. Obama’s latest economic report predicted at least three more years of fairly high unemployment even if the stimulus succeeds, so speed can’t be the only criterion.

Democrat Jim Oberstar of Minnesota, chairman of the House Committee on Transportation and Infrastructure, has suggested that shovel-ready should apply to projects that can begin within a year, not just 90 days. This would give a real boost to mass transit; a two-year window would leave even more time to make thoughtful decisions. But if Congress decides that big and fast are all that matters, get ready for a legislative version of Brewster’s Millions.

The prospect of a haphazard stimulus exploding the national debt is scary too – partly because we paid $450 billion in interest last year, rivalling what we spent on Medicare, and partly because our liabilities could crush us if foreign investors sour on Treasury bonds.

That’s why Obama’s advisers want to focus on temporary initiatives that won’t drown us in red ink by creating long-term obligations, which they call tails. It would be nice to give cash-strapped transit agencies enough money to reduce fares for a year, but what happens when the year is over?

Similarly, some liberals have proposed temporary increases in Social Security benefits, but that kind of generosity tends to become permanent.

On the other hand, some initiatives have negative tails – spending money now saves it later. That’s one reason Obama is so keen on energy efficiency; retrofitting 75% of federal buildings would curb emissions and set a powerful example as well as slash government energy costs for years to come.

Obama also wants to invest in computerising health records, which would cost tens of billions up front but could save hundreds of billions in government health costs. “At some point, we’ve got to start turning this around,” says Democratic Congressman Ron Kind of Wisconsin, who wants the stimulus to create a new commission on US liabilities. “We can’t keep borrowing against our children’s future.”

But the most important stimulus principle will be change. Obama campaigned for it and won a mandate to pursue it. If he can make sure every initiative promotes his top priorities – reducing our dependence on fossil fuels, investing in our future competitiveness and rebalancing our economic playing field in a way Joe the Plumber would call spreading the wealth – the stimulus can succeed even if it fails to stimulate.


How to Get Smart

So where should the money go? And how can we make sure it gets there? In all three elements of Obama’s plan, there is great promise as well as potential pitfalls.

The first element will be giving money to state and local governments to offset their shortfalls and prevent them from raising taxes, slashing services and downsizing public employees. Just about every economist wants this aid approved yesterday because just as public dollars can have a big multiplier effect, public cuts that are imminent in New York, California and Florida can have a negative multiplier effect.

“You can’t let the safety net unravel just when people need it most,” says Len Burman, director of the nonpartisan Tax Policy Center. “A lot of states have been terribly irresponsible, but this probably isn’t the best time to teach them a lesson.”

But when will there be a better time? We should bail out the public sector, but only with serious strings attached; otherwise, we’ll repeat the bailout of the financial sector, which pocketed the federal handouts and kept doing whatever it pleased. Bailouts should be reserved for states and communities facing the most drastic contractions – and even

those shouldn’t be rewarded for frittering away surpluses on sunny-day tax cuts and race-to-the-bottom subsidies designed to lure out-of-state businesses. States shouldn’t be rewarded for keeping their fiscal houses in order by stiffing Medicaid programs either.

Obama’s team has proposed increasing the federal share of Medicaid in exchange for assurances that states won’t knock more families off their rolls. And his advisers hope to direct the aid where it’s needed most – a tough sell in the Senate, where every state has equal power.

But Obama should drive a hard bargain. He could provide more aid to states that promote energy efficiency through building codes and incentives for utilities. He could funnel aid directly to transit agencies and metropolitan governments, which tend to be more progressive than states.

He could take Senate minority leader Mitch McConnell’s advice and give loans instead of grants, which would both help the Treasury down the road and encourage states to make wise investments. He could require states that receive bailouts to promote wind and solar, expand health coverage or buy fuel-efficient police cars.

If they don’t want to, they don’t have to take handouts. The bottom line should be: federal money, federal priorities.

Obama’s second strategy will be giving money to people – through tax cuts as well as food stamps, jobless benefits and health care for the unemployed. Direct transfers are the fastest way to ship money out of the Treasury, but they don’t provide stimulus if they don’t get spent.

That’s what happened last year to a $168 billion stimulus package that relied on income tax rebates – remember when $168 billion was a big deal? – but foundered when many recipients hoarded the cash or paid down credit card debt. It turns out that smart personal-finance decisions make for a lousy stimulus.

It also turns out that the best way to boost the economy by giving away money is to give it to people who can’t afford to save it. That’s why food stamps work so well as a stimulus. And that’s why Obama is pushing a permanent $500-per-person credit on payroll taxes for every worker making less than $200,000 a year. But his rationale for broad-based relief goes beyond stimulus: he has repeatedly promised a fairer tax code that would make work pay for everyone, and this might be his last chance to play with an extra $1 trillion.

The main downside of tax cuts and benefit increases will be their tails; pity the politician who tries to taketh away what he’s already giveth.

That’s why the best test of any cash stimulus will be whether it makes sense on its merits. Obama’s aides have already dropped a proposal to give businesses a $3,000 credit for every job they create – an invitation to game the system. But payroll-tax relief will reward work and put money in the hands of the people who need it most. And there’s no time like the present.

The rest of Obama’s stimulus will be New Deal – style government spending on needed goods and services, often with modern twists. That means smart meters and weatherization programs to prevent wasting energy; transmission lines and solar panels to promote alternative energy; green school buildings and sewage-treatment plants; wetlands restoration in the Everglades and coastal Louisiana; repairs for aging dams, bridges and airports – plus broadband networks, research, job training and, as Obama

has suggested, anything else that seems like a good idea. This is an ideal time for the government to spend money on infrastructure, because labour and equipment are cheap. And improving our shameful infrastructure will improve our competitiveness.

The ideal focus of infrastructure spending would be green projects that help reduce our addiction to fossil fuels, but there’s only so much of that ready to go.

Nathaniel Keohane of the Environmental Defence Fund started ticking off his wish list in an interview: $1 billion for homeowners to install energy-efficient windows, $750 million for truckers to use fuel-efficient equipment, $600 million for smart boiler controls.

“Still $998 billion to go,” he said with a sigh. “Really, I spent time on this, and it’s a reach to get to $100 billion.”

Obama and his team are starting to sound irked by demands for more. Why retrofit only 75% of federal buildings? Uh, it’s not exactly cost-effective to retrofit a particle accelerator. What about more high-speed rail? Wonderful, if there were more projects ready to go. Why stop at weatherising 2 million homes? Sorry, there are only so many guys who know how to use caulk guns.

It will be tempting for Obama to let Congress and the states fill the gaps with their own wish lists. But as Obama adviser Larry Summers has warned, a poorly designed stimulus “can have worse side effects than the disease that is to be cured.”

Handouts for clean coal, ethanol and other misguided energy technologies would be worse than inaction. With apologies to Keynes, incentives to “build houses and the like” could help inflate the same bubble that burst last year.

And infrastructure spending has been one area where Congress has consistently exhibited an impressive bipartisan determination to do the wrong thing.

These days, House Transportation and Infrastructure chairman Oberstar is flacking a Rebuild America plan that pays new respect to transit, but it still puts highways first; you can’t expect too much reform from a guy who’s served as a staffer or member of Capitol Hill’s prime pork committee since 1963, a guy who earmarked a $3 million highway in the last transportation bill to relieve the notorious congestion between County Road 565 in Hoyt Lakes, Minn., and the intersection of Highways 21 and 70 in Babbitt. Meanwhile, states like Alabama, Kansas and Texas have been releasing lists of shovel-ready transportation projects that are dramatically skewed toward out-of-the-way sprawl roads. Missouri’s list was all roads, none of them in St. Louis. Obama has vowed to reject earmarks, but if Congress simply passes cash to the states according to the usual formulas – and it will unless Obama intervenes – America is in for yet another festival of asphalt. There is even talk of waiving the regular cost-sharing requirements for local and state governments, an excellent way to make sure they green-light oinkers they would never pay for themselves.

The obvious solution would be some kind of independent arbiter to establish performance measures and evaluate stimulus projects for timeliness and tails as well as competitiveness and carbon.

During his campaign, Obama proposed an infrastructure bank that wouldn’t finance projects that don’t produce economic or environmental returns. But Oberstar hasn’t put in 45 years just to cede power to a commission.

“It’s like turning around a battleship,” Puentes says. “And we just don’t have the time.”


The Psychology of Stimulus

So the scramble is on. The big splash water park – complete with a gym and “quality meeting space” – might sound like a waste of $22 million, but it would provide a nice stimulus for the people of Gastonia, N.C.

The travel industry wants a $10 million loan to promote the US as a destination, a tougher job these days. To the American Apparel & Footwear Association, this crisis only highlights the need to eliminate import tariffs on shoes.

“Building self-esteem is critical,” explains Matt Rubel, CEO of the parent company of Payless, “and not having a new pair of shoes – you know, having a pair that’s tattered and doesn’t fit – that does not create good self-esteem.”

Let’s face it: fiscal stimulus is a frustratingly inexact science. Nobody knows precisely what it will do in the short term, and in the long term, it isn’t that different from any other government spending, except that the point of the spending can be the spending itself. As always, there will be winners and losers; it’s impossible to stimulate everyone equally.

In two years, if the recession is over, sceptics will claim it would have ended regardless of the stimulus.

If it lingers, proponents will credit the stimulus for preventing a drearier outcome. As with the first round of the financial bailout, its most important short-term effect will probably be psychological, calming markets by sending a message of government engagement.

It will be an expensive message, and we’ll be paying for it for a long time. Obama can’t control how markets or employers react, but he can use the opportunity to start keeping promises and start moving the country away from dirty energy, crumbling infrastructure and economic inequality.

If he trades those goals for size and speed, he’ll blow a unique chance to chart a new direction. He doesn’t need to beg Congress to spend; that’s like begging Cookie Monster to eat. He needs to take a stand: No money without reform.

That won’t just rebuild consumer confidence; it will rebuild citizen confidence too. As the shoe guy said, at a time like this, self-esteem is critical. – TIME