As hard negotiations get under way, the President-elect is starting the tough job of rallying public support for the ambitious $775 billion plan
President-elect Barack Obama rocketed to national prominence and won the battle for the nation's highest office in large part thanks to his extraordinary communication skills. Now, just 12 days before he takes office, he's turning to those skills to convince Americans that his ambitious $775 billion stimulus plan will go a long way to helping pull the U.S. economy out of its deep funk.
In his first major speech since being elected, in which he echoed John F. Kennedy, FDR, and even the poet Langston Hughes, Obama warned that quick and "dramatic" moves are needed. Otherwise, "a bad situation could become dramatically worse." He urged bipartisan action, without add-on provisions that would delay the package, saying: "The true test of the policies we'll pursue won't be whether they're Democratic or Republican ideas, whether they're conservative or liberal ideas, but whether they create jobs, grow our economy, and put the American Dream within reach of the American people."
Elements of the plan highlighted by Obama include: a $1,000 income-tax cut, which he said would reach 95% of American families; spending on alternative energy initiatives; investing in infrastructure improvements including the electric grid and broadband lines; modernizing classrooms; and computerizing health records. "The overwhelming majority of the jobs created will be in the private sector," he said, "while our plan will save the public-sector jobs of teachers, police officers, firefighters and others who provide vital services."
The televised speech, at George Mason University in Fairfax, Va., was short on exact dollar figures for Obama's proposals and comes after the President-elect spent several days hashing out the initial details of the plan in closed-door meetings with congressional leaders and his economic advisers. But as the hard negotiations get under way—and critics of the various parts of the plan he has proposed start to emerge—Obama is beginning the tough job of rallying public support for the expensive plan.
Already, many—and not just deficit hawks—have begun to worry about the extraordinary size of the plan. Obama's team has proposed some $775 billion in stimulus, with perhaps $300 billion to go to tax cuts for businesses and individuals. But with every business and consumer lobbying group in Washington throwing up its own preferred proposals—and with many in Congress angling to get long-favored ideas included as well—the size could quickly grow. Estimates that the total package could hit anywhere from $1 trillion to $1.3 trillion by the time all is said and done are floating around Washington.
Too Much, Too Fast
That prospect is starting to bring out criticism that too much money is going to be thrown too quickly at ineffective projects and programs, running up the deficit for little long-term benefit. "It's incredibly difficult to identify things that are valuable in the long run, can be financed in the short run, and get the money out the door quickly," former Congressional Budget Office Director Douglas Holtz-Eakin, an adviser to Senator John McCain (R-Ariz.) in the Presidential campaign, told the Associated Press. "It would be preferable to take any stimulus you feel is necessary and target it on a few things—don't spread it as seed money for a thousand programs that'll never stop growing."
That worry was heightened by the fact that details over the package came out just days before the Congressional Budget Office issued its forecast that the 2009 budget deficit will soar to an astounding $1.2 trillion—some 8.3% of GDP, a postwar record. And at that, points out Thomas Gallagher, the head of policy research for institutional broker ISI Group, the deficit projection is highly optimistic. The stimulus bill alone, including interest costs, is likely to add another $1 trillion to the deficit over the next decade, he says. And the CBO estimates also assume that all of the Bush tax cuts are rescinded by 2010 and that the Alternative Minimum Tax is fully applied—neither of which has the slightest chance of being true. Eliminate those and other unrealistic assumptions built into the CBO estimates, Gallagher says, and the deficit grows by another $4 trillion over the decade.
Obama defended the package as necessary, given the deep crisis the country faces. "There is no doubt that the cost of this plan will be considerable," he said. "It will certainly add to the budget deficit in the short term. But equally certain are the consequences of doing too little or nothing at all, for that will lead to an even greater deficit of jobs, incomes, and confidence in our economy."
It's not just the total dollars that are worrisome. Many critics also fret that some of the specific programs Obama has proposed may do little good. Much of that criticism is focused around his plan to offer a roughly $3,000 credit for companies that create jobs. Most tax analysts say such measures aren't likely to be effective.
"You want to do this to subsidize jobs that wouldn't have been created in the absence [of the credit], but it's virtually impossible to figure out which ones those are," says Bill Gale, director of Economic Studies at the Brookings Institution. "A company that cuts 100 jobs won't get the credit, even if without the subsidy it would have cut 1,000 jobs. And a company that creates 100 jobs, even though it was planning to do so anyway, will get the benefit. So the ability of this kind of credit to impact decisions is really difficult to judge."
Critics also have begun to target Obama's support for an industry-backed proposal that would allow money-losing companies that had been profitable to write off their current losses against profits going back five years, rather than two years as the law currently allows. That would lead to big tax refunds for homebuilders, banks, and others that made bundles of money during the housing boom but are drowning in red ink now. Congress already rejected the proposal—seen by many as a big bailout for the companies that caused the financial and housing mess in the first place—when it passed an initial stimulus bill last February.
Obama's backing of the plan has revived its prospects, though passage is far from certain. With more companies facing red ink now, many in Congress are worried that costs—estimated at about $25 billion last spring—could soar. And many Democrats simply don't like the principle of it.
"Some members are saying, "Why do we have to do this? We're subsidizing bad companies with good companies' tax dollars," says Daniel Clifton, head of D.C. policy research for Strategas Research Partners. While he doesn't believe the growing questions are enough to kill the proposal, much depends on whether the opposition grows. And that, to a great degree, will depend on whether Obama proves to be as persuasive once he is in the White House as he proved to be in running for it.
Indeed, late Thursday afternoon in the aftermath of Obama's speech, Chuck Marr, an analyst with Barclays Capital DC Research, warned that a backlash has begun to build on Capitol Hill against allowing banks that have already benefited from Treasury rescue funds to take advantage of the extended loss write-off. Some in Congress have begun to argue that even if the write-off provisions are passed as part of the stimulus plan, a carve-out should be made so that Citigroup and other bailout recipients can't profit from the extension as well.
"A policy argument can clearly be made that such a provision would be beneficial for banks and the economy broadly as it would help repair the balance sheets and capital positions of these institutions," Marr told clients in a written report. "But again, the politics could become difficult, and the industry is in a weak political position to advance its interests."