The Trillion-Dollar Solution

Much of today's chatter centers on unofficial word [1] from the Obama-Biden transition team that its economic recovery plan will include $300 billion in tax cuts. [1] As the incoming administration is estimating the size of its plan between $675 billion and $775 billion (though perhaps with an expectation that Congress will increase the size), dedicating such a large percentage to tax cuts restrains how much will be invested in infrastructure, clean energy, health care, education, state government aid and anti-poverty measures.

The stated political reason for jacking up the size of the tax cuts is to relieve pressure from the conservative minority, entice Senate Republicans to come on board and achieve the symbolic victory of a bipartisan supermajority. (A dubious goal, as noted by Paul Krugman [2], David Sirota [3] and Hilzoy [4].)

But that''s not the only pressure on the incoming administration.

While media reports indicate President-Elect Barack Obama wants to keep the overall size of the plan below $1 trillion for "psychological" reasons [5], calls are growing for a plan of just that size.

On Friday, the governors of Massachusetts, New Jersey, New York, Ohio and Wisconsin deemed a $1 trillion package necessary [6] to meet the crisis, or else it would fail to positively impact the economy and force states to make economically damaging budget cuts. The W. Post [6] reported:

The governors recommended that the stimulus plan include $350 billion for infrastructure, including transportation, wastewater and broadband projects; $250 billion for anti-poverty programs such as Medicaid, unemployment insurance, food stamps and child care; $250 billion in flexible education spending to maintain funding for programs from pre-kindergarten to higher education; and middle-class tax cuts...

...The proposal the Democratic governors discussed Friday is not only larger than others under discussion but presents a new emphasis on education, they said. The recession is causing about 25 states to make or consider making cuts in education, [MA Gov. Deval] Patrick said.

Ohio Gov. Ted Strickland said he applauds the idea of responding to the economic crisis with infrastructure jobs. But he also said that if the states do not get significant help to offset their own cuts, they will be working at cross-purposes with this aid and harming their economies in the long term.

"We may be putting people to work while at the same time we are laying off teachers, allowing college tuition to explode and failing to provide adequate Medicaid resources to the most needy," Strickland said.

Wisconsin Gov. Jim Doyle said, "We will see quality fall off in our schools," adding: "We will see a great restriction of university education, or such soaring tuition that ordinary hard-working families will be unable to afford it."

"I think often during these days about my parents, who grew up during the Great Depression and went to public schools . . . and went to a great state university," Doyle said. "Those people educated in the '30s went on to win a world war and bring this country into the '60s and '70s."

Similarly, the Congressional Progressive Caucus has proposed [7] a $1 trillion recovery plan. As described by The Nation's Katrina vanden Heuvel: [8]

In addition to much needed investments which have already been laid out--like the extension of unemployment insurance while joblessness soars, increasing food stamps, and assisting cash-strapped states with Medicaid--the CPC plan goes a step further. It takes a holistic approach to economic recovery and the needs of ordinary Americans by addressing infrastructure, human capital, keeping people in their homes, job creation, fiscal relief for state, local and tribal governments, education and job training and tax relief for lower-income families.

That adds to Nobel economic prize-winning voices such as Joseph Stiglitz [9], who said back in November that "at least $600 billion to $1 trillion over two years" is needed, and Paul Krugman [10], who said of the $775B estimate: "I'd like to see it bigger ... the risks of being too small are much bigger than the risks of being too big."

The Institute for America's Future Main Street Recovery Plan established $900 billion [11] as "the floor, not the ceiling, of what needs to be done." That plan included $145B for middle-class tax cuts, and $755B in public investment for traditional infrastructure, clean energy, energy-efficiency, education, health care, state government aid and anti-poverty measures.

If the overall size of Obama's plan doesn't move, and he insists on $300 billion in tax cuts, that would constrict public investment, and dilute the impact of the plan. (Public investment is far more likely to stimulate the economy in the short-run than tax cuts [3], especially business tax cuts, not to mention the long-term infrastructure needs we have to address [12] after years of neglect.)

However, if the incoming Obama administration recognizes that the economic facts point to $1 trillion as a number to embrace and not resist, $300 billion in tax cuts would not prevent us from investing $755 billion in our economic foundation: our infrastructure, our state services and our people.

Excessive tax cuts may not be the best way to get our economy back on track. But more important is to make sure we invest enough in America's future, our roads, rail, energy, education and health.

If we put the right pressure on the Obama administration, we can do right by our economy. If all the pressure comes from the Right, our economy will pay the price.