Written by

Martin Feldstein

CAMBRIDGE –The tax package agreed to by President Barack Obama and his Republican opponents in the United States Congress represents the right mix of an appropriate short-run fiscal policy and a first step toward longer-term fiscal prudence. The key feature of the agreement is to continue the existing 2010 income-tax rates for another two years with no commitment about what will happen to tax rates after that.

Without that agreement, tax rates would have reverted in 2011 to the higher level that prevailed before the Bush tax cuts of 2001. That would mean higher taxes for all taxpayers, raising tax liabilities in 2011 and 2012 by about $450 billion (1.5% of GDP).

Because America’s GDP has recently been growing at an annual rate of only about 2% – and final sales at only about 1% – such a tax increase would probably have pushed the US economy into a new recession. Although the new tax law is generally described as a fiscal stimulus, it is more accurate to say that it avoids a large immediate fiscal contraction.

The long-term implications of the agreement stand in sharp contrast both to Obama’s February 2010 budget proposal and to the Republicans’ counter-proposal. Obama wanted to continue the 2010 tax rates permanently for all taxpayers except those with annual incomes over $250,000. The Republicans proposed continuing the 2010 tax rates permanently for all taxpayers. By agreeing to limit the current tax rates for just two years, the tax package reduces the projected national debt at the end of the decade (relative to what it would have been with the Obama budget) by some $2 trillion or nearly 10% of GDP in 2020.

That reduction in potential deficits and debt can by itself give a boost to the economy in 2011 by calming fears that an exploding national debt would eventually force the Federal Reserve to raise interest rates – perhaps sharply if foreign buyers of US Treasuries suddenly became frightened by the deficit prospects.

The official budget arithmetic will treat the agreement on personal-income tax rates as a $450 billion increase in the deficit, making it seem like a big fiscal stimulus. But the agreement only maintains the existing tax rates, so taxpayers do not see it as a tax cut. It would be a fiscal stimulus only if taxpayers had previously expected that Congress and the administration would allow the tax rates to rise – an unlikely prospect, given the highly adverse effects that doing so would have had on the currently weak economy.

Even for those taxpayers who had feared a tax increase in 2011 and 2012, it is not clear how much the lower tax payments will actually boost consumer spending. The previous temporary tax cuts in 2008 and 2009 appear to have gone largely into saving and debt reduction rather than increased spending.

It is surprising, therefore, that forecasters raised their GDP growth forecasts for 2011 significantly on the basis of the tax agreement. A typical reaction was to raise the forecast for 2011 from 2.5% to 3.5%. While an increase of this magnitude would be plausible if a forecaster had previously expected tax rates to increase in 2011, it would not have been reasonable to forecast 2.5% growth in the first place with that assumption in mind. So, either the initial 2.5% forecast was too high or the increase of one percentage point is too large.

What is true of the agreement is also true of the decision, as part of that agreement, to maintain unemployment insurance benefits for the long-term unemployed. This, too, is essentially just a continuation of the status quo. No new benefit has been created.

The most substantial potential boost to spending comes from a temporary reduction of the payroll tax, lowering the rate paid by employees on income up to about $100,000 from 6.2% to 4.2%. But, while the decline in tax payments will be about 0.8% of GDP, it is not clear how much of this will translate into additional consumer spending and how much into additional saving. Because this tax cut will take the form of lower withholding from weekly or monthly wages, it may seem more permanent than it really is, and therefore have a greater impact on spending than households’ very feeble response to the previous temporary tax changes.

The final component of the agreement is temporary acceleration of tax depreciation, allowing firms in 2011 to write off 100% of capital investment immediately, in contrast to the current rule, which stipulates a 50% immediate write-off, followed by depreciation of the remaining 50% over the statutory life of the equipment. But, at a time when interest rates are very low and large businesses have enormous amounts of cash on their balance sheets, this change in the timing of tax payments is not likely to do much to stimulate investment.

A greater stimulus to business investment may come from the perception that Obama’s agreement to extend the personal-income tax cuts for high-income individuals signals his administration’s reduced antagonism to business and the wealthy. Obama’s recent statement that he favors reforming personal and corporate taxes by lowering rates and broadening the tax base reinforces that impression. Let’s hope that’s true.

Martin Feldstein, Professor of Economics at Harvard, was Chairman of President Ronald Reagan’s Council of Economic Advisers, and is former President of the National Bureau for Economic Research.

Copyright: Project Syndicate, 2010.
http://www.project-syndicate.org

August 6, 2009

Written by Michael Grabell and Jennifer La Fleur as reported in ProPublica

Since the economic stimulus bill passed nearly six months ago, the Obama administration has repeatedly pledged that the money would reach middle America, seeping into the communities hardest hit by the recession.

But analysis of the most comprehensive list of stimulus spending to date found no relationship between where the money is going and unemployment and poverty.

Stimulus spending is literally all over the map, according to ProPublica’s analysis, which examined nearly all the contracts, grants and loans the government has reported awarding. Some battered counties are hauling in large amounts, while others that are just as hard hit have received little.

Take Trigg County, Ky. [2], where unemployment was 15.8 percent in June after the auto industry crisis rippled among suppliers. The stimulus has chipped in $1 million toward a biofuels facility and $30 million for a road project. According to the data, the county has been awarded $2,419 per resident.

But LaGrange County, Ind. [3], hasn’t fared so well. Despite having the identical unemployment rate, it has received only $33 a person. The community is still trying to recover after recreational vehicle plants shuttered last fall. Yet the stimulus has provided little more than the education and rural housing money that every county is scheduled to receive.

For months now, Democrats and Republicans have debated whether the stimulus is trickling down to communities that need it most. Much of the available evidence has been anecdotal, however, or based on studies that examined only transportation spending or a smaller list of projects.

The debate accelerates today as President Obama and Vice President Joe Biden visit Elkhart, Ind., and Detroit for a progress report on the economy that will again highlight the stimulus. What the available data show is that spending is uneven and sometimes runs contrary to measures of need.

Elizabeth Oxhorn, the White House stimulus spokeswoman, said much of the money thus far has moved through existing grant formulas that don’t take into account regional economic swings. But as some newer stimulus programs kick in — such as economic development grants and money to hire police officers — there will be more discretion in where to send dollars, she said.

“Where we do have opportunities to target assistance and programs that are meant to help hard-hit areas, we have done that, particularly in the hard-hit auto communities,” Oxhorn said.

First Look at County-Level Spending

Overall, the stimulus program will pump $787 billion into the economy, including tax cuts.

To assess what has happened so far, ProPublica combined all the data on the federal stimulus Web site, Recovery.gov, with reports from other government sources into a list totaling $120 billion worth of stimulus spending. Of that, ProPublica examined $55 billion that could be traced to the county level.

Getting a complete accounting of the stimulus is nearly impossible because some of its largest elements — tax cuts for individuals, increases in Medicaid and unemployment — aren’t being tracked to the local level or have yet to be distributed by the states.

While those programs clearly benefit individuals hurt by the recession, they aren’t intended to create or sustain many jobs, as with dollars aimed at infrastructure or schools. The 7 percent of overall stimulus funding in ProPublica’s analysis is the broadest, most complete snapshot of spending to date.

The largest categories are highway projects, Pell Grants for low-income college students and funding to school districts for disadvantaged students. The data also include airport grants, small business loans, housing assistance, nuclear cleanup and military construction contracts.

ProPublica tested the relationship between spending per person and several socioeconomic and demographic factors across more than 3,100 counties and equivalent areas, such as Louisiana parishes, to see if there was a statistically significant pattern in the way money has been allocated.

Nationwide, the results showed no significant relationship across counties when spending was compared against unemployment, poverty, race and income. Looking within state boundaries, spending did have a relationship to unemployment in a few cases — but not always in the same direction.

In New Jersey [4], for example, counties with high unemployment were more likely to get more stimulus money per person. The opposite proved true in Michigan [5], which has the nation’s highest jobless rate at 15.2 percent. A searchable list of county stimulus projects and demographics is here. [6]

Nuclear Cleanups Boost Rural Counties

The biggest winner so far — at nearly $12,000 per resident — is Thomas County [7], an area of 583 people in the Nebraska Sandhills. Unemployment there is 4.8 percent, about half the national rate.

Judy Taylor, chairwoman of the Village Board in Thedford, said the majority of residents consider the main stimulus project, a $7 million viaduct over the railroad tracks, a waste of money.

“Out here, there seems to be plenty of work for people,” said Janice Hodges, whose family owns a gas station nearby. “It probably could have been better used somewhere else.”

Overall, the counties faring the best in the stimulus program are sparse communities with a giant road project — such as Brooks County [8], Texas, or Hocking County [9], Ohio — as one expensive project to a county with few people can skew per-capita figures.

Other counties doing well are home to Cold War weapons plants. The stimulus includes $6 billion to clean up and dispose of waste in 12 states, and those were among the first contracts awarded.

Thanks to the massive cleanup of the Hanford Nuclear Reservation, Benton County, Wash. [10], has received more than $1.5 billion — second only to Los Angeles County‘s [11] $2 billion in total funding so far. Benton County’s per capita spending: $9,300.

In metro areas, per-capita spending varies. LA County’s funding equates to $215 per person. New York County [12], which covers Manhattan, is receiving $610; its neighbor, the Bronx, is getting $185. Palm Beach County, Fla., is receiving $57, and Wayne County, Mich., epicenter of the auto industry meltdown, has received $183 per resident — about the national average for spending that could be tracked to the county level.

Some well-off counties are benefiting greatly.

Summit County, Utah [13], home to Park City and several upscale ski resorts, is one of the wealthiest counties in the country with a median household income of $83,000. Under the stimulus so far, it’s received $659 per person.

The money includes a $15 million interstate paving project, a $5 million bridge replacement, $1 million for sewers and sidewalks on Main Street in Coalville, and a $570,000 small-business loan to a Park City oral surgeon.

John Hanrahan, chairman of the Summit County Council, said the highway and bridge projects are in the rural part of the county and are mainly used by long-haul truckers rather than residents.

“It doesn’t necessarily help a farmer a lot for hay or gas,” he said. “It doesn’t affect the ski industry. We still have a significant portion of the population who are struggling with this recession.”

Hanrahan’s point underscores one of the basic uncertainties when determining who benefits from stimulus dollars. Money spent on a project doesn’t necessarily stay in the community. Construction workers often drive through several counties to job sites.

“People will live in one area and work in another,” said Mark Zandi, chief economist for Moody’s Economy.com. “Some county in a region could be getting more money but it could have a beneficial impact on other counties in the region.”

Obama’s Pledge: Help Is on the Way

When Obama launched the stimulus package in February, he visited Elkhart, a city that had seen its jobless rate skyrocket from a 5.8 percent in October 2007 to 20.8 percent this March.

The next day, he visited Fort Myers, Fla., which had been pummeled by the foreclosure crisis. Since then, administration officials have repeatedly visited auto industry towns to promise help.

Trigg County is one struggling area that has seen a flood of stimulus money. The county, on the Kentucky-Tennessee border, northwest of Nashville, has about 13,000 residents but received $32.5 million.

The county’s largest manufacturer, Johnson Controls, made car seat frames until it closed in March, leaving 560 people out of work. But right on the heels of that shutdown came $30 million in federal money for an ongoing project to widen U.S. Highway 68.

That stimulus money freed state funds already pledged to the $55 million expansion, protecting the contractor’s current workforce. State officials said it might have stalled without the stimulus.

The U.S. Forest Service awarded $2 million in contracts to clean up the Land Between the Lakes recreation area, which had been devastated by an ice storm. The agency also gave the county a grant for a facility that will convert wood to fuel to power a local hospital.

“When you tally it up and see the dollars that will come into our area through the stimulus, it is working,” said Stan Humphries, Trigg County judge-executive. “It doesn’t move as fast as we would like or reach as many families as we would hope for. But we feel that we are getting our share of the funds.”

Big Pots of Money Hard to Track

Edmund Phelps, a Nobel laureate who is director of Columbia University’s Center on Capitalism and Society, said it’s no surprise that spending so far doesn’t relate to characteristics like employment or poverty. To get money out quickly, the government relied on funding formulas that aren’t designed for an economic downturn. “It’s kaleidoscopic,” he said of the stimulus. “And it was all done very quickly.”

Some of the largest pots of money — tax cuts, food stamps and Medicaid assistance — go to more than 100 million individuals, and government auditors are struggling to estimate the local impact.

“Can you send a man to Jupiter? In theory you can,” said J. Russell George, the Treasury inspector general for tax administration. “We could in theory track every dollar, but you have to consider the expense and the time it would take to do that.”

For other types of spending programs — such as the $54 billion to stabilize state budgets and help local schools, or $6 billion to build water and sewage treatment plants — the money trail stops at the state governments, which are still deciding how to divvy up the funds. Only a fraction of the stabilization money has been sent to the states from Washington.

Other programs, such as transit grants, mask where the jobs are created. When the Akron, Ohio, transit authority bought 19 buses, for example, it created work at local rubber suppliers — but also at the plants that made the buses in Kansas, North Dakota and California.

“It’s difficult to take into account all of the different dimensions,” said Steve Murdock, a former Census Bureau director who is a professor of sociology at Rice University. “You have populations with various kinds of needs and local economies that reflect different kinds of conditions.”

Elkhart’s Poor Cousin Next Door

As Obama returns to Elkhart, he might want to consider LaGrange County just to the east.

While Elkhart County has been awarded about $169 per resident — a little less than the national average — LaGrange has received just $33 a person, according to the data.

Both counties saw their economies crater last year when high gas prices and tight credit made it difficult to sell recreational vehicles, a primary industry there. Dozens of factories, dealerships and suppliers shut down while thousands lost their jobs.

LaGrange County has several needed transportation and infrastructure projects, said Keith Gillenwater, the county’s economic development director. But so far, it has been shut out of any of the federal highway funding doled out by the state government.

“It’s frustrating,” he said. “To me there’s a lot of disparity that should be re-examined and taken into consideration.”

 

ProPublica is America’s largest investigative newsroom.

KNOXVILLE, Tenn. — To the casual eye, the basement of this city’s Firehouse 9 looks like a jumble of old hydrants, Dr Pepper cartons, rakes and random gear. To specialists in energy efficiency, the 1960s-era building is a mess of a different sort: wasteful hot water heaters for the firefighters’ showers, ancient refrigerators and outdated lights.

Shawn Poynter for The New York Times

Mike Saylor, left, and John Plack, Jr. look at bulbs in Knoxville’s Fire House 9. The city is about to find out which buildings are wasting the most energy.  

Wrapping up an elaborate energy audit, Knoxville is about to find out which of 99 city buildings are wasting the most energy. It hopes to begin repairs this summer, just in time to catch a tsunami of federal stimulus money earmarked for such unglamorous tasks as replacing light bulbs and fixing leaky insulation.

Knoxville’s timing is excellent. The city began the arduous work of cataloging deficiencies before the stimulus bill passed, and it is well along in planning its next steps. But experts worry that other beneficiaries, especially cities, are not ready to oversee the huge sums of energy-efficiency money about to come their way.

The money in the bill is enough to pay for a tremendous expansion of efficiency efforts across the country. But as with other parts of the stimulus package, the efficiency plan is creating tension between spending the money quickly, to get rapid economic stimulus, and spending it well, to do the most good over the long run.

“There’s enormous opportunity here for expansion of energy efficiency in this country,” said Lowell Ungar, the policy director for the Alliance to Save Energy, an advocacy group. “But there is certainly the potential for waste.”

President Obama signed the stimulus package into law on Feb. 17, hailing it as a shot of money big enough to help shake the economy from its lethargy while advancing many of his campaign priorities. Accelerating the country’s energy transition is at the top of his list. Many experts in the field agree with him that carefully chosen investments in efficiency will ultimately save more than they cost, by cutting energy bills.

At least $20 billion in the stimulus bill was earmarked for programs like improving the efficiency of government buildings and the homes of poor people, and trying to find better ways to save energy. That is far more, advocates say, than any bill in history. Within a few months, the money is likely to start landing in the bank accounts of thinly staffed state and city agencies that are accustomed to scraping for a dime here, a dollar there.

Utah expects that its state energy office will receive $40 million for energy efficiency, renewable energy and related programs — 123 times the size of the office’s current budget, said Jason Berry, who manages the four-person unit. He is about to go on a hiring spree.

The package contains $5 billion to weatherize low-income homes through the Department of Energy, enough to give the state programs that manage that work 10 to 30 times the money they received last year, said Christina Kielich, a department spokeswoman.

For advocates of this relatively obscure program, “it’s like they finally got to the other side of the desert and it’s pouring rain,” said Seth Kaplan, a vice president of the Conservation Law Foundation, an environmental group.

The stimulus package also contains $4.5 billion to modernize federal buildings and $2.5 billion for research into energy efficiency and renewable energy. The biggest chunk, $6.3 billion, will be distributed by the Energy Department in grants to state and local governments, which can spend the money on things as diverse as thicker window panes for state capitols and rebates for homeowners who change their light bulbs.

Homes and commercial buildings account for 39 percent of national energy consumption. Experts say that improving their efficiency is not only cost-effective but also a good way to reduce the nation’s emissions of the greenhouse gases that cause global warming.

But figuring out how to spend the money effectively — learning which university buildings need their doors caulked, for example, or which firehouse walls have insulation that is too thin — can involve time-consuming, tricky analysis by skilled technicians.

“People are very conservative about their buildings,” said Donald Gilligan, the president of the National Association of Energy Service Companies, a trade group. “Nobody wants to put a failed technology into the school buildings or have the lights not work.”

In Knoxville, a team of auditors hired by the city is spending six months peering into the grimy nooks of fire and police stations and even the convention center, where one employee referred to the downstairs boiler area as a “money-eating room.”

Knoxville — which says the stimulus money may help accelerate or expand its program — hopes to reduce the city’s energy bills as much as 25 percent, and the city is “definitely on the front end of the wave as far as efficiency and municipalities addressing efficiency,” said John Plack Jr., a director of project development for Ameresco, which is conducting the Knoxville energy audit.

In the Southeastern region of the country, where Mr. Plack works, low electricity prices have often made saving energy an afterthought, unlike in California and much of the Northeast. For example, Nashville, nearly 200 miles west of Knoxville, has not conducted an energy audit of its city buildings, though it hopes to use stimulus money to look through its own stock of fire stations and libraries.

“There’s a lot of municipalities out there who are completely unaware this is moving forward,” Mr. Kaplan said, referring especially to smaller cities. “They just don’t have the infrastructure in place to deal with this.”

The Energy Department, which is doling out most of the grants, has been assailed on Capitol Hill for delays in disbursing other types of assistance for clean energy. Ms. Kielich said in an e-mail message that the department hoped efficiency grants would begin flowing to city and state energy offices within 120 days, and that it planned to begin disbursing weatherization money “expeditiously and responsibly.”

On the receiving end, absorbing the huge increase in money for weatherization could be particularly challenging, said Ian Bowles, the secretary of energy and environmental affairs for Massachusetts. Though he contends it can be done, “the weatherization folks are going to have to quintuple their effort in order to put that money out,” he said.

In some cases, the managers of efficiency programs may not need to look far to find ways to spend the money.

In Knoxville, the Community Action Committee, whose operations include helping poor people weatherize their homes, works from a building with a $14,000 monthly utility bill — some of it because of an enormous skylight that lets in too much blistering Tennessee sunshine in the summer.

“It’s embarrassing,” said Barbara Kelly, executive director of the committee. “We do better for our clients than we do for us.”

Our Perspective:

I applaud the stimulus but I am always nervous when large sums of money is out into the government’s hands. Responsible spending is the key to this stimulus spending. Investing in the infrastructure ( roads, bridges, rails and energy), is an investment in our future. This will only make us a stronger nation.

Irresponsible spending and earmarks will only tarnish our efforts and be counterproductive. The United States is poised to lead the next great energy evolution.

Let’s be sure to hold our elected officials accountable!

Let us know your thoughts? You may leave a comment or email george@hbsadvantage.com

(CNN) — A coalition of Democrats and some Republicans reached a compromise that trimmed billions in spending from an earlier version of the Senate economic stimulus bill.

Senators worked late into the night to trim billions from the original stimulus bill.

Senators worked late into the night to trim billions from the original stimulus bill.

CNN obtained, from a Democratic leadership aide, a list of some programs that have been cut, either entirely or partially:

Partially cut:

• $3.5 billion for energy-efficient federal buildings (original bill $7 billion)

• $75 million from Smithsonian (original bill $150 million)

• $200 million from Environmental Protection Agency Superfund (original bill $800 million)

• $100 million from National Oceanic and Atmospheric Administration (original bill $427 million)

• $100 million from law enforcement wireless (original bill $200 million)

• $300 million from federal fleet of hybrid vehicles (original bill $600 million)

• $100 million from FBI construction (original bill $400 million)

Fully eliminated

• $55 million for historic preservation

• $122 million for Coast Guard polar icebreaker/cutters

• $100 million for Farm Service Agency modernization

• $50 million for Cooperative State Research, Education and Extension Service

• $65 million for watershed rehabilitation

• $100 million for distance learning

• $98 million for school nutrition

• $50 million for aquaculture

• $2 billion for broadband

• $100 million for National Institute of Standards and Technology

• $50 million for detention trustee

• $25 million for Marshalls Construction

• $300 million for federal prisons

• $300 million for BYRNE Formula grant program

• $140 million for BYRNE Competitive grant program

• $10 million state and local law enforcement

• $50 million for NASA

• $50 million for aeronautics

• $50 million for exploration

• $50 million for Cross Agency Support

• $200 million for National Science Foundation

• $100 million for science

• $1 billion for Energy Loan Guarantees

• $4.5 billion for General Services Administration

• $89 million General Services Administration operations

• $50 million from Department of Homeland Security

• $200 million Transportation Security Administration

• $122 million for Coast Guard Cutters, modifies use

• $25 million for Fish and Wildlife

• $55 million for historic preservation

• $20 million for working capital fund

• $165 million for Forest Service capital improvement

• $90 million for State and Private Wildlife Fire Management

• $1 billion for Head Start/Early Start

• $5.8 billion for Health Prevention Activity

• $2 billion for Health Information Technology Grants

• $600 million for Title I (No Child Left Behind)

• $16 billion for school construction

• $3.5 billion for higher education construction

• $1.25 billion for project based rental

• $2.25 billion for Neighborhood Stabilization

• $1.2 billion for retrofitting Project 8 housing

• $40 billion for state fiscal stabilization (includes $7.5 billion of state incentive grants