Commentary | Budget Taxes and Public Investment

EPI statement on economic recovery package

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February 12, 2009

The upcoming economic recovery package is a critical step in getting the economy moving again and laying the foundation for future growth. But make no mistake—the economy is in such a dramatic free fall that this legislation by itself will not prevent additional job loss or rising unemployment. Nevertheless, reducing the loss of jobs can prevent a catastrophic loss of income and economic opportunity that could affect every segment of our society and be especially painful for the low-income and minority communities that are most vulnerable. This package will save or create at least three million jobs over the next three years, and that will be a major achievement.

The recovery package achieves its goals in several ways.

• First, it provides major public investments in transportation, water resources, education, health, science, and energy that will provide employment now but also improve productivity, energy efficiency, and educational attainment in the years ahead.

• Second, there are important social supports provided to low-income families (child tax credit, earned income tax credit, increased nutritional assistance) and to the unemployed (extended and higher benefits) that will assist these vulnerable groups. We know from experience that providing income supports to these populations will lead to increased consumption that helps boost the overall demand for goods and services and thereby generate employment.

• Third, the package’s fiscal relief for state and local governments provides a quick boost to employment as it prevents the scaling back of programs that are needed and that employ not only public employees but also an extensive array of private sector contractors.

• Fourth, the “Making Work Pay” tax relief in the package will provide an income boost to 95% of American workers, and because it is better targeted than earlier tax cuts (2001 and 2003), it will help boost consumer spending and create jobs.

Unfortunately, the package contains spending that will be far less effective. The changes to the alternative minimum tax in this package will have a minimal effect on consumption or jobs. And the significant reductions in business taxes will be of little benefit. Again, this is unfortunate because businesses will increase their investments and maintain or add employment only when they can profitably sell to customers. These business tax breaks will clearly improve profits, but without more customers, these tax breaks will have a modest employment impact at best.

This downturn is severe and will become more so, having an extensive adverse impact on every region, occupation, and business sector. Only a large, multi-faceted program can begin to turn the economy around, and this legislation is a major step forward. The recipients of these funds will need to be held accountable for using them effectively.

But even with this package, we still have significant economic and policy challenges ahead of us, including stabilizing the housing market and preventing foreclosures; ensuring access to high-quality affordable health care; modernizing financial market regulations; improving our educational system; and much, much more. This is a first step toward righting our nation’s economic ship, but much work remains to be done to promote widely shared prosperity for all.

See more work by Lawrence Mishel and John Irons