Nobody needs to be told that our economy is going down the tubes at a rate unseen for decades. Every week brings new numbers that are setting records. In just the three months ending in November the job loss was 1.26 million, the worst since 1975. We have lost more than 2 million jobs in 2008.
To arrest this downward spiral, the Obama team is talking about an economic stimulus package of about $800 billion over two years. Some are complaining that this is too much. But it is actually not so large considering the size of the problem we are facing. It is about 2.7 percent of GDP. The recent increase in military spending plus tax cuts for the rich – compared to 2001 levels — adds up to about the same.
Even if we take into account the rest of our red ink, and we actually hit the dreaded "trillion-dollar deficit" in 2009, how extreme would this be? A trillion-dollar deficit would be about 6.7 percent of GDP. In 1983, coming out of our last deep recession, President Reagan ran a deficit of 6 percent of GDP. And the current recession could easily be worse than that one. We really don’t know where the bottom is yet.
The Obama stimulus also differs from the deficit spending that we accumulated in the Bush (or Reagan) years in a profound way. Tax cuts for the rich – and much more horrifically in the case of spending on the Iraq war – are unnecessary and socially destructive. By contrast, President Obama is proposing to spend money on things that we actually need.
State and local governments will need at least $100 – $150 billion next year to keep from cutting back on their employment and education and making the recession much worse. We will need increases in food stamps, unemployment insurance, and Medicaid spending for the poor – who are most at risk of suffering from the destruction caused by the excesses of Wall Street financiers and the government officials who failed to police them.
Obama’s plan will also include spending to repair our roads, bridges, and schools – much of which is long overdue. There will inevitably be tax cuts in the package, but at least these will go to working and middle class people, unlike the bulk of the Bush tax cuts.
Two things that could turn the stimulus package into an even more positive force for change would be health care and environmental spending. The federal government can subsidize health insurance for the uninsured, with public sector insurance like Medicare, as President-elect Obama promised during his campaign. This would advance health care reform while also providing jobs and spending in the health care sector. To begin the transition to a less fossil-fuel based economy, the federal government can also subsidize mass transit, the retrofitting of buildings to make them more energy efficient, and start to build a 21st century electricity grid that can handle wind and solar energy sources.
The exact details of the package are not as urgent as its size and the speed with which it is implemented. President Bush and his Republican party have unforgivably destroyed thousands of businesses and hundreds of thousands of jobs by delaying the package until Obama takes office. Further delays by Republicans in Congress should be met with mass outrage.
If anything, the Obama team’s proposed stimulus may not be enough. Nobel laureate economist Paul Krugman has suggested four percent of GDP, or $600 billion for just next year. He may well be right. Better to err on the side of caution, than risk falling into a deeper hole that is even more difficult to get out of.
Mark Weisbrot is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net).