Obama's plan: stimulus or waste?

January 29, 2009 07:07:27 AM

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President Barack Obama argues his mammoth stimulus plan is essential to prevent irreparable harm to the world's largest economy, but opinions are sharply divided over whether it will actually work.

The Democratic-controlled House of Representatives was expected Wednesday to approve the 825-billion-dollar package, despite Republican complaints it is chock full of pointless spending that will fuel US debt, not the economy.

Proponents from Obama down say the spending is a long-term investment in much-needed repairs and renovations, including on infrastructure and schools, that will stand the US economy in good stead for decades to come.

Obama has acknowledged his anxiety about the exploding US debt but expressed confidence Wednesday the stimulus bill would pass.

Hard-pressed workers "are looking to Washington for action, bold and swift," he said after meeting 13 top corporate leaders.

Republican House leader John Boehner told ABC News his party was "for more than just cutting taxes."

But he added: "What we're concerned about, some of the spending in this bill has nothing to do with creating jobs or preserving jobs.

"The bill on the floor today is a bill that has too much spending, too much wasteful spending and buries our kids and grandkids under a mountain of debt."

In any case, the president recognized, the benefits of stimulus spending will be limited unless US banks start lending again.

That is supposed to be addressed with the second tranche of a 700-billion-dollar bailout now in the works, although the administration has hinted that more money may be needed.

Some of the bank bailout money, reportedly 100 billion dollars, will go towards fixing the home foreclosure crisis that is at the root of the system-wide financial and economic tumult.

Jeffrey Kling, an economist covering public policy at Washington's Brookings Institution, said greater government spending rather than tax cuts would give most bang for the buck.

But he noted the property market was omitted from the stimulus package.

"That seems like a massive failure of prioritization given the housing foreclosure crisis is the most important problem facing us," Kling told AFP.

"We're just going to have to come back to the foreclosure problem later, when it's got even worse."

Obama's stimulus plan nods toward Republican ideology by devoting about 275 billion dollars to tax cuts, including individual credits of 500 dollars.

But the lion's share of the package under debate in the House goes to infrastructure spending, including over 60 billion dollars to roll out new power grids and make federal buildings energy efficient.

Forty-one billion would go to modernizing US schools, 30 billion on highways construction and six billion to expand rural access to broadband Internet.

Much of the money is intended for social welfare spending, which Republicans argue is a back-door way of expanding Democratic "big government" rather than boosting the economy for the long haul.

That includes 79 billion dollars in help to state governments to prevent cuts to key services, 43 billion to increase unemployment benefits and 87 billion to expand healthcare insurance for the poorest.

Republican critics are citing a new study by the non-partisan Congressional Budget Office that says less than half the package would actually filter through to the broader economy in the next two years.

Obama's aides said the CBO study was only a partial look at the overall package, and took issue with its conclusion that the total size would top one trillion dollars once debt and interest repayments were factored in.

The patron saint of Depression-era stimulus economics, John Maynard Keynes, argued that sometimes, governments have to throw money at the problem even if not all the spending seems wise.

To create jobs, he wrote, the government could "fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again."