The version of the American Recovery and Reinvestment Plan unveiled on Jan. 15 by House Democrats is breathtaking in its scope and cost. Intended to retain and create 3.7 million jobs over the next two years, the $825 billion package of federal government investments includes dozens of spending measures ranging from $200 billion in fiscal relief to help state and local governments, to $6 billion to extend broadband to rural areas, a 21st century version of Depression-era rural electrification. Two thirds of the total value consists of spending, with one third for tax cuts.
Negotiated with President Barack Obama's transition team, the plan - a.k.a. Stimulus II or ARRP - is an important first step to halt the downward economic spiral triggered by last fall's financial meltdown. As large as it is, though-5 percent of gross domestic product-it is not sufficient to create a sustained recovery. Two other steps are essential. First, more dramatic action is needed to put the brakes on the collapsing housing market. Second, making a recovery sustainable will require a set of policies to lift wages and bolster the middle class. Without these two complementary steps, ARRP might provide temporary relief for our economic illness but not a cure.
Whatever its limitations as a long-term solution, ARRP will provide much-welcome short-term budget relief for New York and other states (45 states face budget gaps). The plan will increase the federal share of Medicaid spending and provide billions in education aid to states and school districts. Both of these measures will help to moderate the severe budget cuts proposed by Gov. David Paterson. New York State should receive upward of $10 billion - and possibly as much as $15 billion - over two years -- funds that will help close the state's budget gaps. Such federal relief will help states maintain their spending and prevent spending cuts or tax increases, both of which would have intensified the downward economic spiral.
A year ago, Congress and the Bush administration agreed to a $150 billion stimulus package that consisted largely of tax rebates. Most economists now agree that last year's stimulus was not up to the task because tax cuts provide less "economic bang for the buck" than most other forms of stimulus. Economic forecaster Mark Zandi, a former advisor to presidential candidate John McCain, estimates that every dollar in tax cuts generates only $1.01 in economic activity, much lower than the spending impact of increasing unemployment compensation ($1.63), state fiscal relief ($1.38) or spending on infrastructure ($1.59). Also, since the tax rebate checks were sent out in May and June, when gasoline prices were skyrocketing, many recipients spent the money to cover their gas costs.
The magnitude of a proposed second stimulus has mounted steadily since last September's financial market meltdown and the ensuing sharp collapse in the consumer spending that accounts for 70 percent of demand in the economy. The spending collapse was compounded by a credit market freeze as Wall Street firms and banks confronted a mountain of bad debts created by high-risk lending and unregulated gambling. The crash of the housing and stock markets destroyed literally trillions in home equity and retirement savings held by millions of middle class households. Along with steadily mounting job losses, this caused households to sharply reduce spending. The collapse of consumer spending is thought to have pulled GDP down by as much as 5 percent during the fourth quarter of 2008.
It is no exaggeration to say that this is the worst economy since the Great Depression. The 2.6 million jobs lost in 2008 were more than in any year since 1945. Overall unemployment could be 9 percent by the end of the year and 11 percent in 2010 in the absence of the recovery plan, according to economist Zandi. Already, unemployment among adult black men is 13.4 percent. Housing prices have fallen 25 percent on average. There were 2.25 million home mortgage foreclosures last year, and one out of every six homeowners owes more on their mortgage than their house is worth.
The proposed American Recovery and Reinvestment Plan is a 21st century version of a government-led recovery and investment program, combining some of the best elements of the Depression-era Works Progress Administration, the Eisenhower era commitment to build the Interstate Highway System, the Apollo Project, and the Great Society. The plan includes spending that will not only provide some short-term stimulus but will increase the long-term productive capacity or efficiency of the economy.
One of the biggest components is $52 billion for various "green jobs" programs from weatherizing public buildings (see related story) and homes to reduce energy demand, to developing a "smart" electric power grid that is both more reliable and better able to transmit clean, renewable energy.
The package would also create jobs by spending $67 billion for infrastructure. Because of the urgent need to boost jobs as quickly as possible, it emphasizes "shovel ready" projects, including mass transit systems, highways, bridges, airports, national parks, water and sewer systems, flood control, and environmental cleanup. The Metropolitan Transit Authority will be able to use some of these monies to fund some of the construction projects and equipment needs in its capital budget. Governor David Paterson submitted an extensive list of 1,922 "ready-to-go" projects to the Obama transition team.
This second stimulus package provides $12 billion to support forward-looking research and development investments that could be particularly important in the future, including biomedical, climate change and alternative energy research, and funds to modernize and expand government and university research facilities.
The ARRP includes $5 billion for job training and employment services, including $1.2 billion to create 1 million summer jobs for youth. It offers additional -- and substantial funds -- for worker training and education as part of the education, healthcare, and science and technology initiatives. There is $5 billion for early childhood development, including additional slots in subsidized childcare and Head Start.
A particularly critical part of ARRP is aid to the unemployed. The program includes $36 billion to extend and modestly increase unemployment benefits, and incentives to encourage states to expand unemployment insurance coverage for low-wage and part-time workers. An additional $30 billion would subsidize health coverage for unemployed workers and provide 100 percent federal funding (i.e., dropping the requirement for a state match) for two years for Medicaid-eligible workers who become unemployed.
Nearly $30 billion would go to increase food stamps, low-income heating assistance, assistance provided under federal Supplemental Security Income, aid for the homeless and Temporary Assistance for Needy Families block grants. A total of more than $11 billion would fund repair and modernization of public housing, help communities build and rehabilitate low-income housing using green technologies, and enable communities to purchase and rehabilitate foreclosed and vacant properties.
New York's unemployed workers, their families, the state government and local governments and the broader New York economy will benefit significantly from this much-needed and unprecedented economic recovery plan. New York, though, must make sure that the billions of federal dollars it will receive for infrastructure, energy development and other projects lead to the creation of good jobs that provide decent wages, benefits and career development opportunities. This plan also presents New York with a golden opportunity to develop a strategic plan to revitalize the upstate economy and help the downstate economy adjust to a permanently smaller role for the finance sector.
The Obama team has suggested ways to use some of the remaining funds from the $700 billion Emergency Economic Stabilization Act, the so-called "bailout" that was passed in early October, to address the housing crisis. In a Jan. 15 to Congress, Larry Summers, who is to be director of the National Economic Council, indicated the new administration would commit $50 billion to $100 billion to "reduce the number of preventable foreclosures," reform bankruptcy laws, revamp the modest Hope for Homeowners program, and require banks receiving bailout assistance to "implement mortgage foreclosure mitigation" programs.
These measures can only help but may well not be sufficient to ensure that banks renegotiate mortgages on the scale necessary to halt the slide in housing prices. Until that happens, housing prices may fall further and the value of the mortgages and mortgage-backed assets that dominate the balance sheets of the major financial institutions will remain questionable. Investor's suspicions about the "toxicity" of these assets have paralyzed credit markets for most of the past year.
Originally, the $700 billion financial "bailout" was supposed to take those toxic assets off the hands of the banks, under the Trouble Asset Recovery Program or TARP. Some of the remaining $350 billion could be used for this. Now, though, the incoming Obama administration appears to be considering whether to provide another round of massive funding ($1 trillion or more) to salvage bank portfolios.
Given the magnitude and character of the federal interventions so far, the banking system already has been effectively nationalized and is "private" in name only. While the government has allowed bank executives to remain in control, at some point, Washington leaders will have to decide whether taxpayers might be better served by completing the nationalization of the banking system rather than trying to revive banks that have impaled themselves on massive amounts of toxic assets. To date, the overall magnitude of taxpayer resources pledged to financial market rescue can only be described as "galactic" -- $7 trillion to $8 trillion in capital infusions, low-interest loans and federal guarantees.
Along with the dual collapse of the housing and financial markets, the middle class squeeze played a major role the current economic precariousness. Wages have not kept pace with productivity or with the health and retirement security costs employers have shifted to workers. As a result, the average working family has been forced to take on substantial home equity or credit card debt in recent years to try to maintain living standards. The absence of a firm foundation for middle class prosperity meant that economic growth from 2003 to 2007 was possible only because of the economy's bubble tendency and the excessive reliance on borrowing at every level.
Boosting the middle class through higher wages and increased economic security involves such things as passage of the Employee Free Choice Act that will remove barriers imposed by the current labor law system that frustrate workers' efforts to join unions.
The American Recovery and Reinvestment Program is an essential step for the U.S. to take in pulling the economy out of this historic slump. As the House leadership's version of ARRP is negotiated in the House and with the Senate, it is critical that the provisions aiding states and low-income populations remain the centerpiece and that any business tax cuts be limited. To achieve a balanced and long-lasting prosperity, however, other actions will be needed to resolve the housing crisis and to rebuild the middle class. Without such policies, the recovery and reinvestment plan might create a short-term rebound but one that will fizzle out after two or three years.
The new administration gives every indication that it is aware of the need for these complementary actions. Time will tell whether it can achieve initial success on the economic recovery front and build the political support to turn recovery into sustained prosperity.
James Parrott is deputy director and chief economist of the Fiscal Policy Institute. He has been studying and writing about the New York economy since he landed in New York City a quarter century ago.
With the Obama team taking office and the Senate formally introducing the American Recovery and Reinvestment Act of 2009, momentum is building for the stimulus package. But with Americans taking a dim view of the bank bailout only months after it was approved, Congress and the new administration must ensure the stimulus bill really solves the problems. America needs more than an $875 billion morning-after pill for our fiscal difficulties: We need to redefine our infrastructure.
New York City offers a number of possibilities for the kinds of projects the stimulus package could fund. Here are some examples in three key areas.
With its dense population and old electricity transmission grid, the Northeast cries out for energy investment. As a large coastal city, New York offers a good road map to what many cities need: access to more renewable sources and investment in pathways and transmission to fix our failing grid.
Recycle Grease
President Barack Obama's proposal to "spend $150 billion over 10 years to advance the next generation of biofuels and fuel infrastructure" could help New York recycle the millions of gallons of waste grease generated in its nearly 1,000 school cafeterias, more than three dozen hospitals and scores of City University sites. Reclaiming this grease could create jobs and help power transit and school buses, ferries and much of the municipal vehicle fleet.
Investing in Wind
The more than 8.5 million residents on geographical Long Island (including Brooklyn and Queens, as well as Nassau and Suffolk counties) are precariously linked to the North American grid. Queens has suffered two major blackouts in the last five years. Yet, so far the whole island has done little to tap the resource of offshore wind.
As "Cape Wind" proposes, Queens, Brooklyn and the rest of New York City should be a primary beneficiary of large-scale investment in wind power. In addition to the massive construction needed to build and install the windmills, the investment in new and more reliable transmission capacity would boost places like Oak Point in the Bronx, making them a focal point of next generation of infrastructure.
Freight Connections
Nestled between Port Morris and Hunts Point, Oak Point is across the water and a bit northwest of LaGuardia Airport. This area of the Bronx is already the site of a number of key connections between Long Island and the continental United States, including the Triboro and Hell Gate Bridges and underwater transmission cables linking the Bronx and with power plants in Queens.
Now Oak Point could become a focal point for new Cross Harbor Freight Transportation investments under consideration by the Port Authority.
This underutilized railroad yard has been trapped in political fighting for more than a decade, but it should become a waterfront rail hub that could serve as a national model for other urban areas.
On the shore, it could include a barge-to-rail transfer facility for trucks, containers, and ferries to North Brother Island and even to Lower Manhattan. Below ground, power tubes and transmission lines would better connect Long Island and the rest of North America. This would help avoid the energy supply interruptions that hit seven states in 2003 and the grid failures that caused the Queens blackout of 2006.
A real infrastructure plan would build in redundancy and leave extra capacity for the next generation of communications and energy innovation.
The stimulus package calls for the creation of a National Infrastructure Reinvestment Bank, seeded with $50 billion over its first 10 years. A number of major arteries in New York City could be models for using these funds creatively.
Connecting Brooklyn to the World
Atlantic Avenue is a critical transportation link whose best days lie ahead. As Brooklyn Heights slides down to Red Hook, the avenue's 19th century rowhouses are still home to many small businesses and residents. Buses running along this busy corridor connect downtown Brooklyn to the waterfront.
Atlantic Avenue ends at Upper New York Bay. Across the harbor, lie the huge towers of Lower Manhattan and Jersey City. Atlantic Avenue could help link those centers and downtown Brooklyn and Long Island. Historic street cars could connect the New York City Transit Museum with Brooklyn Bridge Park.
With the Brooklyn Queens Expressway overhead, the foot of Atlantic Avenue could serve as a hub for cross-harbor shipping via truck ferry or barge to New Jersey ports. An all-water connection to Long Island from New Jersey would mean fewer trucks rumbling across Canal Street or the Staten Island Expressway.
With major rehabilitation planned for the Brooklyn Bridge in 2010, more traffic will use the already overburdened Manhattan Bridge. Plans to begin construction on a new Goethals Bridge in 2012 may also exacerbate congestion woes.
While a truck ferry may be somewhat expensive to operate, it could offer more consistent travel times than jammed road bridges. That means lower costs for fuel, fewer noxious truck emissions, and less wear and tear on bridges and highways.
If the vision for better mobility along the East Coast includes a network of freight ferries (often called "Short Sea Shipping") dozens of new ferry and barge transportation hubs will need to be created at places like 58th Street in Brooklyn along Newtown Creek in Queens and even 34th Street in Manhattan.
Infrastructure may be the backbone of development, but the muscle is all labor. While contractors and builders lobby for expansion and upgrade of bridges, highways and waterfronts, large-scale physical development takes time to ramp up. In the meantime, the glut of office space only grows as its value shrinks. But it doesn't have to be this way.
Cubicles to Classrooms
A labor force must be nourished with education and training. Professional, technical and vocational skills are all needed. In New York schools scramble for space.
So, let's convert commercial buildings into educational facilities. What once were offices can become classroom. Former trading floors can be school auditoriums.
The stimulus plan seeks to invest in "green technologies" such as energy efficiency, weatherization and renewable energy development. We could jumpstart the innovation by giving owners of private buildings grants to cover some portion of their retrofit costs, provided these buildings are adapted for schools that will provide related instruction, research and training.
Preparing for the New Economy
While it may take a while for Americans to get back to work, let's make it easy for them to go to school in the meantime, with grants and loans for promising fields of study. Labor unions and small businesses could receive payroll tax credits or grants to create or expand apprenticeship programs. After all, there is a good chance that the labor force we need 10 years from now may look very different than the one we have right now.
The stimulus will succeed only if it brings new funding mechanisms, both to seed its programs and to help maintain our public infrastructure and public institutions for the future.
With the sharp decline in gas prices, there is no better time to increase a federal tax on fuels to help fund the stimulus and better maintain our infrastructure in the future. According to the Energy Information Administration, U.S. cars and trucks consume close to 390 million gallons of gasoline per day. Every 15-cent a gallon increase in the federal gas tax would generate $20 billion in revenues a year. With a 50-cent tax increase, we could generate well over $600 billion in the first 10 years. After the stimulus is paid off, we could start to repeal the tax.
Ultimately our infrastructure isn't just concrete and steel embedded. It is also the power we generate and the people who keep it all moving forward. Together they enable us to enjoy one of the highest standards of living in the world. To keep that, though, requires hard work. And because our infrastructure has been so neglected - even in the good times - we have to be especially careful about the investments we make in the years ahead.
Carter Craft, a licensed U.S. Coast Guard captain, is an urban planner working in the private sector.
"What is good for GM is good for the country!" -- once the battle cry of U.S. capitalism is now a mumbled query that sounds something like, "What is good for the U.S.? What is good for GM?"
As America's auto manufacturers deal with the largest financial crisis in their history, officials are focusing on how to keep the industry afloat regardless of brand. Hence, the catchphrase, for some, now goes: "What is good for the automotive industry is good for America -- with or without GM."
America needs large scale investment by the federal government that will promote sustained development of public services and private enterprises. Simply lending funds to distressed companies, such as General Motors and Chrysler, to keep them operating will not stimulate economic growth. An innovative program of vouchers to promote mass transit, especially the manufacturing of clean and green buses, would spur investment while saving jobs and helping the environment.
Deteriorating economic conditions in the region have put New York's Metropolitan Transportation Authority in a financial bind. A December report on MTA financing by the Ravitch Commission, named for its chairman, Richard Ravitch, said the situation has become "calamitous."
The MTA faces significant gaps -- of a billion or more -- in its operating budgets for each of the next four years.
By law, the authority's budget must be balanced, meaning it has proposed substantial fare increases, major service reductions, lowering administrative costs, personnel cuts, longer maintenance cycles and an interagency loan.
Uncertainty about the MTA's funding creates uncertainty among the suppliers of the equipment the authority buys. Uncertainty about the capital projects the MTA can fund compounds the already severe uncertainty that investors have. This is exactly what the U.S. economy does not need right now.
Keep in mind that New York's population of 8.2 million is expected to grow to 9.2 million by the year 2034. The Ravitch report, while not advocating specific capital projects, argues for an expanded bus system based on Bus Rapid Transit, which attempts to move passengers more quickly and comfortably through a system of buses-only lanes and other improvements. "Expanding the bus network is the only realistic approach," the commission said.
Clean buses that operate in a rapid transit mode will be the key to the commercial viability of the New York region. The problem is finding the money to purchase them.
To help surmount this obstacle, I suggest the federal government issue $25 billion of Clean Fuel Vouchers that municipal and state authorities could use to buy cleanly powered buses over the next five years.
The $25 billion figure is a quick calculation of what it would cost to replace the 64,350 gasoline powered transit buses on the road at the end of 2006 with alternative fuel buses, with $500,000 as the cost of each new bus. Twenty-five billion dollars over five years ($5 billion per year) would be a significant increase in the slightly more than $1 billion nationwide the Federal Transit Administration has currently budgeted for capital spending on transit buses.
It also would build on an existing commitment by federal, state and municipal governments. Between 1995 and 2006, the number of transit buses using alternative fuels increased from 2.8 percent to 16 percent. In its 2009 budget, the Federal Transit Administration said it is "striving to increase by 2 percent per year the deployment of energy efficient and low emission technology vehicles in the transit industry." This kind of fiscal stimulus package would significantly ramp up the 2 percent growth in clean fuel buses on the road.
As of 2007, about 21 percent of transit buses operating in New York City were powered by either compressed natural gas or diesel/electric. The MTA's proposed capital program calls for the purchase of 2,492 new buses. Of those, 1,544 will use clean fuel technology.
A commitment to these buses would create investment opportunities for manufacturers and jobs for the unemployed.
Nationally, the voucher program would employ autoworkers and activate plants now idled by a precipitous drop in car and truck sales. It would spur banks to loan money for mass transit production. Replacing diesel powered buses with hybrid/electric ones or vehicles fueled by compressed natural gas also would reduce carbon monoxide and nitrogen oxide emissions.
This is how the voucher plan would work: Transit authorities would receive vouchers they could use to buy clean fuel transit buses within five years. Once a transit authority places the order for a bus, the voucher would be pledged to the bus manufacturer. The bus manufacturer could use the vouchers as very high quality collateral to raise working capital during the production stages.
The vouchers could also be bought and sold. If the MTA, for example, decided it valued operating income over an expansion of its clean fuel bus fleet, it could sell some or all of its vouchers. Because the vouchers would be federal obligations, there is no risk they wouldn't be honored.
Once sold, the voucher could be used for any hybrid/electric, electric or fuel cell vehicle, not only transit buses. Those buying the vouchers might be other municipalities, rental car companies, taxi fleet operators, trucking companies, equipment-leasing companies, and school bus operators. The secondary market for vouchers would help those governments that cannot effectively use their vouchers. It also would broaden the fiscal stimulus while keeping it focused on demand for automotive products.
The vouchers will create a flow of private capital to the sector of the automotive industry that designs, builds and maintains green machines. This could help General Motors.
Why does that matter? The survival of many firms is linked to GM's ability to buy and pay for the goods and services they produce. GM, Ford and Chrysler currently owe about $60 billion to their suppliers. Not only must these receivables be secure, but suppliers must be able to expect timely payment for future sales to the auto companies. Trying to stimulate the U.S. economy while the core of our manufacturing base is in financial distress would be like bailing out a leaking ship with a Dixie cup.
GM has valuable technologies, products, designs, processes and patents along with engineering talent and a skilled labor force. Unfortunately, all of this is trapped in an ossified enterprise. For the company to survive, these assets must be redeployed.
When an earthquake destroys cities and villages, governments around the world mobilize resources to save lives and rebuild wells, schools and hospitals. A financial quake has struck and now is the time for a massive financial lift. To emerge from this worsening global recession each of the world's economically powerful countries must make a commitment to invest significant public funds in sustainable development.
A massive investment in clean fuel mass transit would be consistent with stimulating the U.S. economy, improving air quality, lowering urban road congestion, increasing opportunities for mobility in and outside of the cites, and making U.S. cities the premier showcase for green urban transit. Vouchers can help accomplish that. At the same time, they will increase demand in a key sector of our economy.
Charles A Stone is a professor of finance at Brooklyn College.