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ARRP Analysis and Overview

ARRP Analysis and Overview



|Views: 945 |Likes:
Published by msblucow
This is a very easy to read explanation of the ARRP.
This is a very easy to read explanation of the ARRP.

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Categories:Types, Research
Published by: msblucow on Feb 09, 2009
Copyright:Attribution Non-commercial


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Source: Mark Zandi - Chief Economist , Moody's Economy.comWhile reading this, remember that on Friday, Feb. 6
, the Senate's "Gang of 16" moderate Senators stripped mostof the funding for states, and so-called "Income Support" measures (with the exception of unemployment benefits Ibelieve) from their version of the bill.If we're lucky, and the bill passes the Senate and goes back to committee to be reconciled with the House version,we may be able to get some of these provisions back in. That is what we will have to fight for next.
The fiscal stimulus plan proposed by the House Democrats includes a reasonably designed mix ofgovernment spending increases and tax cuts. The spending increases total about $550 billion in 2009-2010,and there are $275 billion in tax cuts. (total $825 billion)Increased government spending provides a large economic bang for the buck and thus significantly boosts theeconomy. The benefits begin as soon as the money is disbursed and are less likely than tax cuts to be diluted by anincrease in imports.
The most effective proposals included in the House stimulus plan are extendingunemployment insurance benefits, expanding the food stamp program, and increasing aid to state andlocal governments.
Increasing infrastructure spending will also greatly boost the economy, particularly as the current downturn isexpected to last for an extended period. Most of the infrastructure money will be spent on hiring workers and onmaterials and equipment produced domestically.Tax cuts generally provide less of an economic boost, particularly if they are temporary; on the other hand they canbe implemented quickly.
A particular plus for individual tax cuts included in the House stimulus plan such asthe payroll tax and earned income tax credits is that they are targeted to benefit lower- and middle-incomehouseholds that are more likely to spend the extra cash quickly.
Investment and job tax benefits forbusinesses are less economically effective, but are not very costly and more widely distribute the benefits of thestimulus plan.
Income support
The House stimulus plan includes some $100 billion over two years in income support for those households undersignificant financial pressure. This includes extra benefits for workers who exhaust their regular 26 weeks ofunemployment insurance benefits; expanded food stamp payments; and help meeting COBRA payments forunemployed workers trying to hold onto their health insurance. People who receive these benefits are hard pressedand will spend any financial aid they receive very quickly.Another advantage is that these programs are already operating and can quickly deliver a benefit increase torecipients. The virtue of extending UI benefits goes beyond simply providing aid for the jobless to more broadlyshoring up household confidence. Nothing is more psychologically debilitating, even to those still employed, thanwatching unemployed friends and relatives lose their sources of support. Increasing food stamp benefits has theadded virtue of helping people ineligible for UI such as part-time workers.
Aid to state and local governments
Another potent tool included in the House stimulus plan consists of some $200 billion in aid to state and localgovernments over two years. This takes the form of a temporary increase in the Medicaid matching rate to ease thecosts of healthcare coverage; help to local school districts; and broader fiscal relief to states to prevent cuts in keyprograms.More than 40 states and a rapidly increasing number of localities are grappling with significant fiscal problems. Taxrevenue growth has slowed as home sales, property values, retail sales and corporate profits have all fallen.
Personal income tax receipts have begun to suffer as the job market slumps.
Big states including California andFlorida are under severe financial pressure, and smaller states including Arizona, Minnesota and Marylandare struggling significantly.
The gap between state and local government revenues and expenditures balloonedto over $100 billion.
Arguments that state governments should be forced to cut spending because they have grown bloated andirresponsible are strained, at best. State government spending and employment are no larger today as ashare of total economic activity and employment than they were three decades ago.
Infrastructure Spending
Increased infrastructure spending is also a particularly effective way to stimulate the economy included in the Housestimulus plan. The plan includes $160 billion in such spending over two years, with $90 billion in more traditionalinfrastructure such as highway construction, public transit and waterways; a $70 billion for a variety of energy,science and healthcare projects
. The boost to GDP from every dollar spent on public infrastructure is large—an estimated $1.59—and there is little doubt that the nation has underinvested in infrastructure for sometime, to the increasing detriment of the nation's long-term growth prospects.
The argument against including infrastructure spending as a part of any fiscal stimulus plan is that it takessubstantial time for the funds to flow into the broader economy. Infrastructure projects can take years from planningto completion. Moreover, even if the funds are used to finance only projects that are well along in their planning—so-called shovel-ready projects—it is difficult to know just when projects will get under way and when the money willbe spent. These are reasonable concerns in most recessions, but the economy's current problems appear likely tocontinue for some time. It is also reasonable to be worried that this spending will be used on pork-barrel projectschosen not for political rather than economic reasons. To address this worry, policymakers plan to put in place tightcontrols to monitor the spending.
Tax Cuts
The House stimulus plan includes an estimated $165 billion in tax cuts for individuals and $110 billion in businesstax cuts over two years. The largest part of the individual tax cut is a permanent payroll tax credit for workers,amounting to as much as $1,000 for married couples.
The payroll tax credit will be particularly effective, as thebenefit will go to lower income households that do not necessarily earn enough to pay income tax. Thesehouseholds are much more likely to spend any tax benefit they receive.The temporary tax incentives to support business investment and hiring in the House stimulus plan do notprovide a particularly large economic benefit.
Accelerated depreciation by large businesses and expensing ofinvestment by small businesses lowers the cost of capital only modestly and is not a critical factor in businesses'investment decisions, particularly when sales and pricing are so weak. The carry-back of business losses helpscash-strapped businesses, perhaps forestalling some cuts in investment and jobs, but it is unlikely to prompt muchadditional business expansion as it does not improve businesses' prospects. However, including business tax cutsin the stimulus plan is not very expensive, and they distribute the benefits of the stimulus more widely. This is usefulif it expands political support for the stimulus plan and thus accelerates its adoption. Moreover, the depreciationbenefits included in last year
s fiscal stimulus have expired, and extending them through 2010 would forestall abadly timed additional factor (however small) depressing business investment.
The National Economic impactImplementation of the House Democratic fiscal stimulus plan in early 2009 would provide a sub tantialbenefit to the economy.
The stimulus will not keep the downturn from becoming the worst since the Great Depression, but it will ensure thatthe current episode remains a recession and not a depression.
The Senate will pass their version of the bill by noon on Tuesday at the latest. Here's a list of what the Nelson-Collins “gang of 16” cut out of the bill to make room for more tax cuts (
most of these cuts are
t necessarily mean a program has been completely eliminated)$40 billion State Fiscal Stabilization$16 billion School Construction$7.5 billion of State Incentive Grants$5.8 billion Health Prevention Activity$4.5 billion GSA$3.5 billion Higher Ed Construction (Eliminated)$3.5 billion Federal Bldgs Greening$2.25 Neighborhood Stabilization (Eliminate)$2 billion broadband$2 billion HIT Grants$1.25 billion project based rental$1 billion Head Start/Early Start$1.2 billion in Retrofiting Project 8 Housing$1 billion Energy Loan Guarantees$100 million FSA modernization$50 million CSERES Research$65 million Watershed Rehab$30 million SD Salaries$100 Distance Learning$98 million School Nutrition$50 million aquaculture$100 million NIST$100 million NOAA$100 million Law Enforcement Wireless$50 million Detention Trustee$25 million Marshalls Construction$100 million FBI Construction$300 million Federal Prisons$300 million BYRNE Formula$140 million BYRNE Competitive$10 million State and Local Law Enforcement$50 million NASA$50 million Aeronautics$50 million Exploration$50 million Cross Agency Support$200 million NSF$100 million Science$300 million Fed Hybrid Vehicles$50 million from DHS$200 million TSA$122 million for Coast Guard Cutters, modifies use$25 million Fish and Wildlife$55 million Historic Preservation$20 million working capital fund$200 million Superfund$165 million Forest Svc Capital Improvement$90 million State & Private Wildlife FireManagement$75 million Smithsonian$600 million Title I (NCLB)The $40 billion for state aid is astounding. You're not going to see an economic recovery if the states are havingto cut budgets at the same time the feds expand them. They'll cancel each other out.
California is particularly hard hit by this provision.
Here are the tax cuts the Senate put in this, in lieu of the above spending provisions:
1) $70 billion dollars for a patch so that the Alternative Minimum Tax (AMT) doesn't affect high-middle-income earners making under $1 million dollars a year.
This is passed annually because Congress is toocowardly to rewrite the tax code. But it doesn't belong in a stimulus bill, as no less than House Minority WhipJON KYL just said in a floor speech. People making $400,000 a year aren't likely to spend money they get tokeep as a result of fixing the AMT.
2) At least $35 billion dollars for a $15,000 home buyer's tax credit, which will only go to people whohave enough money to buy a house.
This is a craven attempt to reinflate the housing bubble before priceshave settled, and because there's so much inventory on the market it will not spur hardly any new homeconstruction.
3) Around $11 billion for a tax credit for car buyers, which will only go to people who have enoughmoney to buy a new car.
This is not tied to greening the US fleet and will be implemented before fuel economystandards have changed over, so it doesn't even reward fuel efficiency or reducing greenhouse gas emissions.These are tax breaks for suburbanites, which in all likelihood won't get spent at anywhere near the rates thatthey would in the hands of the poor or middle class. As a result, the provisions are not likely to create jobs.

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