Op-Ed

Main Street Needs a New Stimulus

Martin Neil Baily

Main Street economies across the nation are headed in the wrong direction, with homes foreclosed, jobs lost and production down. We are now in a recession and the only question is how deep it will be. A new fiscal stimulus package would, by redirecting spending and employment, prevent the U.S. economy from trending further into the danger zone.

How large should the stimulus package be? Given the uncertainty involved, I recommend an immediate stimulus package of $200 billion, with preparation of an additional $100 billion to be triggered if unemployment goes over 7.5 percent.

Every taxpayer should be concerned about how this additional spending-on top of the $700 billion bailout package-will further contribute to the budget deficit. If the economy goes into a severe recession, however, tax revenues will fall sharply and the impact on the budget deficit will likely be even worse than the impact of the fiscal stimulus.

In short, even if a stimulus package creates a net cost to the deficit, that cost is worthwhile to avoid the damage of a severe recession.

What form should the stimulus package take? First, if the American economy is to move to a sustainable recovery, the housing market has to stabilize. The terms of the new rescue package allow for the purchase of mortgages as well as mortgage-backed assets. I would urge additional funds for families facing default. Enabling families to move into 30-year fixed rate mortgages through Fannie Mae and Freddie Mac at a rate of interest between 5 and 6 percent is an attractive approach to providing this assistance.

It is vital that a stimulus package work quickly and provide as much boost to spending as possible. If this were done soon, the IRS could use the same taxpayer list that was used earlier this year and the money would be released this fall.

Attention should also be directed to the nation’s infrastructure, especially crumbling roads that need repair and neglected bridges that may collapse. Looking after the existing infrastructure is not as exciting as cutting ribbons on new projects, but it could generate jobs quickly and meet an important need.

States and localities are feeling tremendous budget pressures because of the weak economy and the decline in property tax revenue. For starters, infrastructure projects with state and local jurisdictions should not be cancelled because of the short-term budget pressures. Sustaining such projects would, among other things, help avoid job layoffs.

But even more aid should be given to states and localities, which face tougher budget limitations than the federal government. For example, budget assistance could be targeted to states with high unemployment and mortgage default rates, especially to sustain Medicaid spending. Some states, such as California, are finding it difficult or impossible to sustain support for health care because of budget pressures.

Another stimulus approach is assistance for unemployment insurance. This program has traditionally been a backstop for the economy, serving as an important automatic stabilizer. With the job situation deteriorating, there are many workers reaching the point where benefits are exhausted and it would make sense to extend the duration.

Some business tax changes may also be necessary to obtain wide support for a stimulus package. Capital gains taxes are already low. I would urge that we wait and examine the idea of broadening the base of corporate tax and lowering the rate in the context of a larger tax reform package.

The American economy is in trouble and the balance of risks strongly favors a substantial fiscal stimulus. Congress and the White House should act soon to ensure that Main Street America continues to be a great place to live, work and produce.

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