What’s Missing in the Stimulus Plan

William G. Gale
William G. Gale The Arjay and Frances Fearing Miller Chair in Federal Economic Policy, Senior Fellow - Economic Studies, Co-Director - Urban-Brookings Tax Policy Center

January 28, 2009

The $825 billion economic recovery package developed by President Obama and the Congressional Democrats includes new spending on education, health care, unemployment benefits and a vast array of public works projects to create jobs, with tax cuts making up just under 40 percent of the package. Much of the spending is on existing programs, and intended to speed money out the door. Bill Gale along with other  experts discuss what’s missing in an op-ed piece in The New York Times.

The economic recovery package making its way through Congress covers a lot of the key bases — consumer spending, business investment, and state and local spending and federal purchases. The other major pieces of a broad-based recovery package need to cover stabilization and reform of the financial system, a solution to the foreclosure issue, and an effort to harmonize international efforts to stimulate the global economy.

Even when all of that is done, however, there’s one missing piece: an exit strategy. We got into this mess by spending too much and borrowing too much — both the government and the private sector. Now, the proposed solution is to do even more of the same.

That strategy could well restore the level of output and employment over the next few years, but it would do so only by generating levels of spending and borrowing that are even higher and hence more unsustainable than the ones that led to the initial problems.

There are no really good options here, only more or less successful efforts to stave off the major economic downturn that would result from doing nothing. But it should be apparent that even if the stimulus succeeds in turning the economy around over the next few years, it will have done so at the cost of making our medium- and longer-term over-consumption and over-borrowing problems even worse than they already are.