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Economic Stimulus Package

Economic Stimulus Package. President Obama’s Economic Stimulus Package of 2009 Prof. Steve Cunningham Contemporary Problems in Economics. “The Stimulus”. American Recovery and Reinvestment Act (ARRA), signed by President Obama on February 17, 2009

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Economic Stimulus Package

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  1. Economic Stimulus Package President Obama’s Economic Stimulus Package of 2009 Prof. Steve Cunningham Contemporary Problems in Economics

  2. “The Stimulus” • American Recovery and Reinvestment Act (ARRA), signed by President Obama on February 17, 2009 • Jan. 29, House of Representatives passed a $819B bill. • Feb. 10, Senate passed a $838B bill. • Leaders from the two legislative bodies met and resolved the differences, leaving a bill of $787B. • The spending will be financed by the U.S. Treasury selling bonds to borrow the money. • Hope to pay back in 10 years • With interest, total cost will be $1.14 trillion.

  3. Purpose In the introduction to the American Recovery and Reinvestment Act, Congress says the purpose of the stimulus is: • to preserve and create jobs and promote economic recovery; • to assist those most impacted by the recession; • to provide investments needed to increase economic efficiency by spurring technological advances in science and health; • to invest in transportation, environmental protection, and infrastructure that will provide long-term economic benefits; and • to stabilize state and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases.

  4. First Breakdown • $467.7 B in direct spending on projects • $244.0 B in tax cuts and credits • $ 82.4B in additional spending • $794.1B total • Versus $787.0B advertised total

  5. Areas of Stimulus • Agriculture • Commerce, Justice, and Science • U.S. Armed Forces • Energy and Water Development • Financial Services and Federal Government • Homeland Security • Interior Department, Environmental Protection Agency • Labor and Unemployment Assistance • State Department and Veterans Affairs • Transportation Infrastructure • Housing and Urban Development • Education • Public Health • Tax Cuts and Tax Credits in the Stimulus • General Provisions and Miscellaneous

  6. Agriculture Summary: Over $41 billion is given to the Department of Agriculture, the Food and Drug Administration, and related agency programs • $20 billion for the Supplemental Nutrition Assistance Program. • $11.8 billion for Rural Housing and Community Loan Guarantees. T$3.14 billion for Rural Business-Cooperative Service. • $2.5 billion for the Rural Development Broadband Program. $1.38 billion for Rural Water and Waste Disposal Loans. • $650 million for Forest Service Improvements. $500 million for Child Nutrition. $500 million for Wildland Fire Management. • $340 million for Watershed Operations and Flood Prevention Program. $244 million for the Farm Service Agency. • $200 million for USDA Buildings. • $150 million for the Emergency Food Assistance Program. • $100 million for the National School Lunch Program.

  7. Agriculture, Cont’d PROBLEM? • Some of this money is provided to finance no-money-down loans for home buyers. Such loans were a significant part of creating the economic crisis in the first place. • Access to "no money down" loans on a house or access to cheap "subprime" mortgages has directly led to massive foreclosures, impacting housing prices and devaluing mortgage-backed securities. • The reason is that many people who received loan help through these government programs never were able to afford a mortgage payment long-term in the first place. The Housing and Community Facilities Program and related initiatives are only continuing the problem.

  8. DoC, DoJ, NASA, NSF Summary: Over $19 billion is set aside for the Commerce Department, Justice Department, NASA, the National Science Foundation, and other science agency programs. • $5.6 billion for Scientific Research Programs • $5 billion for Law Enforcement Programs • $4.7 billion for the Broadband Technology Opportunities Program • $2 billion for the Edward Bryne Memorial Justice Assistance Grant Program • $1 billion for the 2010 Census Operating Budget • $650 million for Digital TV Converter Coupons • $150 million for Economic Development • Assistance Program Grants

  9. Armed Forces • Summary: Nearly $18 billion is given to the Department of Defense for modernizing bases, building hospitals, and developing new technology, and to the Army Corps of Engineers for infrastructure projects. • The money for the military has very little definition. More strange, why did Congress decide to spend these general funds here when the Department of Defense was going to cut spending. • Military spending for stimulus also ignores the question, if defense spending is so good for the economy, then why not increase it by such a small part of the stimulus package? • The answer is that, despite helping private defense contractors, military spending does not lead to massive economic growth.

  10. Energy and Water Development • Summary: Nearly $52 billion is set aside for energy productivity and efficiency programs through the Energy Department, and water recycling programs through the Interior Department.

  11. Financial Services & Federal Gov’t • Summary: Nearly $9.8 billion for the operating activities of the federal government and for Small Business Administration programs. This section also establishes the oversight board that governs stimulus spending. • $5.5 billion for the Federal Buildings Fund • $3 billion limit for the SBA Secondary Market Guarantee Authority • $450 million Small Business Administration General Fund • $300 million for Replacing the Federal Vehicle Fleet • $100 million for the Community Development Financial Institutions Fund • $84 million for the Recovery Act Accountability and Transparency Board

  12. DHS • Summary: This section provides $3.2 billion for the Department of Homeland Security, Customs and Border Protection, the Transportation Security Administration, Federal Emergency Management Agency, and related agencies to enhance policing measures and expand programs. • $1 billion for TSA Aviation Security • $700 million for U.S. Customs and Border Protection • $650 million for Homeland Security • $615 million for Federal Emergency Management Agency • $240 million for the Coast Guard • $100 million for the Southern Border Security Fence • Buy American Clause

  13. Department of the Interior & EPA • Summary: Nearly $9.3 billion of the stimulus bill is given to the Interior Department and Environmental Protection Agency. • $6.4 billion for EPA Grant Programs. The Environmental Protection Agency has several programs that grant money for clean water and drinking water protection activities • $800 million for EPA Hazardous Waste Clean Up • $735 million for the National Park Service • $500 million for the Bureau of Indian Affairs • $340 million for the Bureau of Land Management • $280 million for the Fish and Wildlife Service • $140 million for USGS Geological Surveys • $75 million for the Smithsonian Institution and NEA • $15 million for the Historic Preservation Fund

  14. Labor and Unemployment Assistance • Summary: This section gives over $75 billion to the Department of Labor and Health and Human Services for general operations, grants, and programs related to job training, helping the unemployed, and promoting health. • Increased Unemployment Insurance (estimated cost $27 billion) • Economic Recovery Payment (estimated cost $14 billion) • Increased Unemployment Checks (estimated cost $8.8 billion) • State Unemployment System Modernization (estimated cost $7 billion) • $5.1 billion for Department of Labor Job Training Programs • $5 billion for the Temporary Assistance for Needy Families Program (TANF) • $2.5 billion for HHS Health Center Grants • $2 billion for the Neighborhood Stabilization Program • $1.09 billion for the SSA National Computer Center • $1 billion for a HHS Prevention and Wellness Fund • $930 million for the Department of Labor Budget • $650 million for HHS Programs • $160 million for the Corporation for National and Community Service • $131 million for Economic Recovery Payment Processing

  15. State Dept and Veterans Affairs • Summary: The stimulus gives $2 billion for State Department and Department of Veteran Affairs programs. • $1 billion for VA Medical Facilities • $350 million for the Department of Veteran Affairs • $290 million for the State Department Capital Investment Fund • $50 million for the National Cemetery Administration

  16. Transportation • Summary: Over $48 billion in the stimulus is set aside for the Department of Transportation and related agencies to invest in all aspects of the nation’s infrastructure. • $27.5 billion for Highway Infrastructure Investment. The Federal Highway Administration will get this money to modernize, repair, and build new roads and bridges throughout the United States. Includes funding for passenger and freight railroads and port infrastructure, so it is unclear exactly how much of this money will be spent on highways. • $8.4 billion for Mass Transit (Does not include high-speed rail. No stated goals or objectives.) • $8 billion for High Speed Intercity Rail (To be defined) • $1.5 billion for Surface Transportation Infrastructure • $1.3 billion for Amtrak • $1.3 billion for the Federal Aviation Administration • $100 million for Maritime Administration. This money will be distributed specifically to “small” shipyards for general assistance, repair, or replacement of facility components.

  17. HUD • Summary: Over $13.6 billion is given to the Department of Housing and Urban Development for programs to help struggling homeowners and those in need of shelter. • $4 billion for the HUD Public Housing Capital Fund • $2.25 billion for HOME Investment Partnerships Program • $2.25 billion for HUD Homeowners Assistance Programs • $2 billion for HUD Emergency Assistance • $1.5 billion for the Emergency Shelter Grants Program • $1 billion for Community Planning Grants • $510 million for Housing Programs on Indian Reservations • $100 million for the Lead Hazard Reduction Program

  18. Education • Summary: Over $102 billion of the stimulus is given to the Department of Education to help states fund education programs and activities. • Unfortunately, instead of creating thousands of jobs in the education sector as promised, the largest chunk of the education stimulus will simply pay for ongoing operating expenses in public schools. Roughly $40 billion will be used to backfill state budgets that have been mismanaged for years, going towards averting layoffs and program cutbacks, but will be distributed by standard population and demographic measures, not based on real "need" or budget shortfalls.

  19. Public Health • Summary: Over $160 billion of the stimulus is given to programs through Medicare, Medicaid, National Institutes of Health, and COBRA insurance, and for developing Health Information Technology (IT) systems. • One important problem with the Health IT system developed by the federal government is the mandatory nature of the current project that violates the privacy of millions of Americans. Letting the private sector develop and pay for an e-health records system instead of a government federal plan would avoid the violation of privacy (because the system would not be forced on individuals by government mandate) and would cost the federal government nothing. • The HIT initiative may have more to do with advancing toward national health care.

  20. Tax Cuts • Summary: An estimated $244 billion in tax cuts and tax credits will go to individuals, businesses, and research initiatives. • "Making Work Pay Tax Credit" (estimated cost $115 billion) • Provides a $400 rebate ($800 for families) on income taxes for workers who make at least $6,452 a year. Those who make less will receive 6.2 percent of those paychecks. For individuals who make over $75,000 a year ($150,000 for a family), the credit will be reduced, and the greater the earnings the less the tax credit will be. This credit will come in both 2009 and 2010. • This tax cut will reduce the overall collection of FICA taxes, the 6.2 percent taken from paychecks to pay for Social Security.  Although this would allow workers to keep more of their hard earned wages, it places further stress on a Social Security system that is already plagued by financial problems.

  21. Tax Cuts (2) • "Alternative Minimum Tax Patch" (estimated cost $70 billion) • The Alternative Minimum Tax (AMT) was designed to prevent high income earners from avoiding taxes, but has since had unforeseen consequences, causing many Americans to be subjected to a higher than necessary tax rate. Each year since AMT was passed Congress has passed a "patch" to adjust the AMT standards for that year and keep families from paying the higher tax rate. The patch for 2009 was passed with the rest of the stimulus and considered part of the overall cost • Renewable and Efficient Energy Incentives (estimated cost $20 billion) • The stimulus includes over 40 tax incentives for renewable and efficient energy research, including a $7,500 tax credit for buying a new plug-in electric vehicle, up to $50,000 for building an alternative fuel station, and various tax credits for developing energy efficient means of creating electricity through wind, solar, or other means.

  22. Tax Cuts (3) • "Child Tax Credit" (estimated cost $14.8 billion) • This credit will increase the tax credit amount per child. IRS code currently gives families a tax rebate of up to 15 percent of all their income over $8,500. The stimulus expands the tax credit by lowering the threshold to $3,000. • "American Opportunity Tax Credit" (estimated cost $13 billion) • This credit increases the maximum college education tax credit from $1,800 to $2,500 maximum, and makes the credit available for all four years of college instead of the current two year limit. The tax credit can be claimed for all college expenses, not just tuition, but it is reduced for students whose parents make over $160,000 as a family.

  23. Tax Cuts (4) • "First-Time Homebuyer Tax Credit" (estimated cost $3.7 billion) • This credit will increase the tax rebate that first-time homebuyers get to $8,000, but only for homes purchased by November 20, 2009. The amount of the credit is reduced for families making over $150,000 a year. • Others

  24. Other views • Prof. John Taylor on the crisis. • President Obama on CNN • CNN (1) • CNN (2) • CNN (3) • Cap and Trade • Currency (1) • Currency (2) • BusinessWeek • BusinessWeek (2) • BusinessWeek (3)

  25. Looking for Money • Taxing Global Corporations • Wants to raise taxes on profits earned abroad. • Threatens to increase costs of U.S. corporations operating overseas by almost $200B. • International transfer pricing: wants to prevent firms from shifting profits. • Tighter limits on credits for foreign taxes paid. • Currently firms don’t pay 35% corporate tax unless they bring profits home. • Reduce international competitiveness? • Reduce exports? • To win business support, the admin has offered to use $75B to make a R&D tax credit.

  26. “You shouldn’t waste a good crisis.” • This material is from the Economist, May 30-June 5, 2009. • Quote from Rahm Emanuel, Chief of Staff. • Mr. Obama is using this crisis to create a bigger role for gov’t in the U.S. • “America has experienced a failure of finance, not of capitalism.” • Even in boom times, 15% of U.S. jobs disappear each year, but new jobs take their places, created by start-ups and expansions. • In a Pew poll released on May 21, 76% of Americans agree that the country’s strength is “mostly based on the success of American business.” • 90% admire people who “get rich by working hard.” • Mr. Obama’s people are using the government’s stakes in carmakers and banks to push goals unrelated to firms’ welfare. Some of these will likely interfere with the firms’ ability to become competitive and stable. • All of this is to say that a lot of the changes are not motivated by economic interests.

  27. Mountains of Debt • From the Economist, June 13, 2009. • “Governments’ thirst for funds will eventually crowd out private investment and reduce economic growth. More alarming, the scale of the coming indebtedness might ultimately induce governments to default or to cut the real cost of their debt through high inflation.” • In the U.S., 10-year Treasuries were at 2% in December, but were 4% on June 10. Much of this stems from falling confidence. Rising interest rates alone could kill a recovery. • Because of difficulty in selling T-bonds, the Fed has been printing money to buy the bonds itself. This will be inflationary. • What to do? An increase in taxes would also kill a recovery. • The only plausible solution is spending restraint. Perhaps raise the retirement age. • Mr. Obama has suggested deficit rules, but care must be taken not to create rules that will simply require tax increases. Spending restraint is key.

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