Too little for those who need it most

Lee Sustar examines the stimulus package passed by the Democratic Congress.

THE ECONOMIC stimulus plan passed by Congress shafts the unemployed, the hungry and tax-paying undocumented immigrants.

And it will have only a limited impact in stimulating the economy--because of the Democrats' capitulation to Bush administration demands centered on tax rebates, while the big money goes to the U.S. war machine.

The $152 billion package will provide some relief for working people--a rebate of $600 for individuals and $1,200 for a married couple, with another $300 for each child in the household. Individuals with income of up to $75,000 per year and couples with incomes of $150,000 are eligible. Seniors on Social Security and people with incomes too low to file taxes were also included in the plan.

However, the rebates are a one-shot deal that won't necessarily result in increased spending--those who are employed and worried about the economy are likely to pay off debts or bank most of the money.

What else to read

For more background on the worsening state of the economy, see Joel Geier's "The coming economic meltdown" in the new issue of the International Socialist Review. New York Times columnist Paul Krugman's article "Don't Cry for Me, America" underlines the scale of the crisis.

For a closer look at the mortgage and housing crisis, see Petrino DiLeo's "Housing bubble deflates," published in the ISR last year.

What's more, the bill provides $7.5 billion in tax credits for businesses to make more investments--even though businesses aren't likely to invest in anything if a recession is dragging down demand.

Another provision in the deal allows government-chartered mortgage insurers to guarantee loans of up to $729,750 in expensive housing markets--a move that critics say will steer lenders toward higher-income homebuyers rather than the lower-income homeowners struggling to refinance adjustable-rate mortgages.

"Economic stimulus to forestall or shorten a recession is a worthy goal," the New York Times editorial board wrote. "But this is ridiculous.

"Before the bill was passed, Congress' own budget office, and many other economists and analysts, told lawmakers--and the public--that the most effective form of stimulus is increased food stamps and extended unemployment benefits for the long-term unemployed who exhaust their initial 13-weeks of benefits. Neither food stamps nor unemployment compensation are in the bill."

Aid for the unemployed--particularly the long-term jobless--is urgently needed. As the Center on Budget and Policy Priorities noted, "In January 2008, the overall unemployment rate was 4.9 percent, and the percentage of all unemployed workers who had been unemployed for 27 weeks or more was 18.3 percent. At the start of the last recession in March 2001, by contrast, the unemployment rate was 4.3 percent, and the percentage of the unemployed who had been out of work for at least 27 weeks was 11.1 percent."

Aid to the jobless would also help the overall economy. According to a study by economist Mark Zandi, each dollar spent on food stamp benefits creates $1.73 in economic demand, while a dollar of unemployment benefits yields $1.64 in demand.

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IF THE Democrats had made this case to the public, they could have stirred anger at the already unpopular Republicans and shamed them into accepting an extension of food stamps and unemployment benefits. But after losing such proposals by a single vote in the Senate, they capitulated.

"Basically, the Democrats played a potentially strong hand badly," wrote economist Robert Kuttner. "They began with a package too small and too feeble, so when it came time to split the differences with the Republicans, they were vulnerable to the usual salami tactics."

This didn't stop House Speaker Nancy Pelosi from hailing the bill as a "gift to the middle class and those who aspire to it in our country."

That "gift," however, won't go to about 12 million undocumented workers who pay taxes--Democrats bowed to Republican demands to include language specifically barring them from receiving rebates.

The Democratic Congress also surrendered to the Republicans' refusal to aid fiscally strapped states, even though half the states have budget deficits totaling $32 billion. Since states are required by law to balance their budgets, these deficits will lead to layoffs and cuts in social spending, thereby dampening economic growth. If the Feds were to step in to cover the shortfall--as they have in previous recessions--the cuts could be avoided.

Spending on infrastructure would be another effective way to boost the economy. The Economic Policy Institute offers a to-do list that includes $5 billion to fix or replace crumbling bridges, an estimated $100 billion in deferred maintenance in U.S. public schools, and $88.5 billion that the Environmental Protection Agency says is needed to prevent chronic sanitary sewer overflows.

Such spending creates jobs. According to the Federal Highway Administration, $1 billion of construction spending generates between 14,000 to 47,000 jobs, and adds $6 billion to gross domestic product. A national infrastructure program could put many of the 200,000 workers who lost their jobs last year as a result of the housing slump.

The Zandi study estimates that each dollar of government spending on such projects leads to $1.56 in economic demand. By contrast, he found that the type of business tax break included in the stimulus package created just 27 cents in additional demand for each dollar of tax revenue given up.

In general, the stimulus package is paltry in view of the scale of the economic crisis. "[T]his is no ordinary cyclical recession," wrote Kuttner. "Rather, it is a sharp and needless economic contraction, caused by a serious blow to the financial system, which was in turn the result of deregulation...

"Worse, this downturn comes on top of three decades of stagnant or declining real living standards for about two-thirds of Americans, and increasing insecurity of employment, health insurance and retirement, as well as rising costs of housing, education and energy."

Kuttner calls for a "major recovery program" rather than a modest stimulus. But the money is going to the Pentagon instead. Overall military spending is approaching $1 trillion a year, about 6 percent of GDP.

The stimulus plan, by comparison, amounts to approximately 1 percent of GDP. It won't do much to stop the looming mortgage foreclosures, layoffs and budget cuts.