House Dems say their stimulus proposal is needed to avert ‘economic chaos’

The $825 billion federal stimulus proposal presented by House Democrats this week proposed $275 billion in tax cuts and $550 billion in spending. That’s $25 billion less in tax cuts than the figure President-elect Obama has used in recent weeks.

According to the Washington Post, House Speaker Nancy Pelosi, D-Calif., called the stimulus proposal a “first step along the way” in what is expected to be an intense, four-week negotiating period with the Senate. Pelosi and Senate Majority Leader Harry M. Reid, D-Nev., say they’ll deliver the final bill to Obama before Congress departs for a President’s Day recess, and that legislators won’t sleep until that happens.

Their arguments — presented in the summary of the proposal — rest on a stark assessment: Without it, the country faces “economic chaos.”

The summary, by the way, is excellent reading.

The economy lost 2 million jobs in the last four months and is projected to lose another 3 million to 5 million in the coming year. Unemployment is going to continue to rise, they say, even with this stimulus package. But without the infusion of federal cash, it will soar into the double digits — and that doesn’t count the numbers who’ve been shifted from full-time work to part time.

And while the deficit will grow dramatically, the Democrats say that without the stimulus spending the growing deficit “…will be devastating and we face the risk of economic chaos.”

While it might seem counter-intuitive that the deficit will grow more if we don’t spend close to a trillion dollars, the Democrats contend that the spending will lead to more economic activity, which will decrease the payment of unemployment benefits and increase tax revenue.

The economic crisis is laid at the feet of consumer debt, which was propelled by stagnant wages while the rich got a heck of a lot richer during the recent economic boom.

The figures given are stunning: 96 percent of income growth in this country since 2001 went to the wealthiest 10 percent, while the rest of the country sustained its standard of living by “…borrowing…and borrowing…and borrowing”:

Since 2001, as worker productivity went up, 96% of the income growth in this country went to the wealthiest 10% of society. While they were benefiting from record high worker productivity, the remaining 90% of American’s were struggling to sustain their standard of living. They sustained it by borrowing… and borrowing… and borrowing, and when they couldn’t borrow anymore, the bottom fell out.

The result is that the credit market eventually froze up because of a consumer base stretched beyond its ability to pay debt–including mortgages, a subsequent lack of consumer spending, and businesses consequently laying off workers or simply shutting down.

The document also gives the rationale behind the bulk of the stimulus package being designated for direct spending rather than tax cuts.

In a nutshell, Americans are so strapped by debt that they’re more likely to spend any tax cut or stimulus check on paying down their debt, rather than consuming new goods and services:

The tax rebates last spring showed that Americans have become so concerned about
their debt and saving that they will not spend a large fraction of any tax cut. Over the last two
decades, Americans’ saving rate went from 8 percent of income to near zero. … As we saw in the spring [when the federal government issued stimulus checks], a sizable fraction of any tax cut to them will be used to pay down debts and not be spent. The same logic applies to tax cuts for corporations who have become more obsessed with reducing their excessive leverage than in hiring or investing.

On the other hand, the authors state, direct federal spending will have nearly complete “pass through” to new goods and services.

Even after the economy hits rock bottom, we’ll continue to need a fiscal boost, the authors say, because the “usual drivers” of recoveries from recession don’t seem viable this time around: housing and auto sales.

So if not housing and auto sales, then what?

The spending proposals are focused in these key areas:

~ Increasing renewable energy production capacity plus renovation and weatherization of buildings to make them energy-efficient.

~ Expanding science and technology research plus broadband access.

~ Investing in transportation infrastructure: roads, bridges, highways, transit, rivers.

~ Investing in education at both the local and state level, from K-12 to higher ed.

~ Health care Investments to computerize health care records, plus investments in preventative care.

~ Helping the unemployed by expanding the food stamp program.

~ Providing state fiscal relief to save public-sector jobs, particularly teachers and public safety workers.

The stimulus plan lays out a laundry list of targeted spending, and between now and President’s Day we’re likely to see quite a few changes. Not to mention, the Washington Post noted, the Republicans already don’t much of it:

GOP lawmakers also balked at the thousands of individual projects designated for funding in the House plan. “Oh, my God,” House Minority Leader John A. Boehner (R-Ohio) said to reporters. “My notes here say that I’m disappointed. I just can’t tell you how shocked I am at what I’m seeing.”

To be continued–stay tuned.