October 12, 2001

The Administration's Stimulus Proposal:  Is it a Sound and Balanced Package?

PDF of fact sheet
full report
PDF of full report

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On October 9, the Center on Budget and Policy Priorities released a report, The Administration's Stimulus Proposal: Is It a Sound and Balanced Package? The report analyses the stimulus plan outlined by Administration officials on October 4, as well as a more detailed proposal the Administration released that day on assistance to the unemployed. While the officials presented the plan as being half tax cuts and half spending provisions, the Center's report finds that in fact, tax cuts make up 90 percent or more of the package's cost over the next ten years. Furthermore, the plan's help for unemployed workers is extremely modest when compared either to the assistance the plan would give to large corporations or to the assistance unemployed workers received in the last recession. The report's findings include:

The claim that the plan is evenly split between spending and tax cuts rests on budgetary sleight-of-hand. Many of the proposed tax cuts are permanent, yet the Administration's $60 billion tax-cut figure includes the cost of the tax cuts only in their first year or two (it is not clear which). Over the long term, the proposal is more than 90 percent tax cuts and less than 10 percent aid to the unemployed. Furthermore, the Administration's spending total includes the defense spending increases it proposed last June, when there was little sign of recession, but its tax cut total does not include the $38 billion in tax rebates sent out this summer or the additional tax cuts that took effect on July 1 or will take effect on January 1.

In sum, if the recession proves to be comparable to that of the early 1990s, the additional unemployment benefits provided under the Administration's plan would constitute only a modest fraction of the amount provided in the earlier recession — $5 billion as estimated by the Labor Department, compared to $35 billion (in 2002 dollars) in the earlier recession.

The Administration's other proposals to assist the unemployed also are quite modest. For example, the proposed $3 billion in grants to state and local workforce boards for health insurance coverage, income supplements, and/or job training for unemployed workers would not make much of a dent in the need for health insurance among workers (and their families) who lose employer-based coverage when they lose their jobs, even if all $3 billion were devoted to this purpose.

Federal Reserve chairman Alan Greenspan and former Treasury Secretary Robert Rubin have emphasized that long-term interest rates have failed to follow short-term rates down because of market nervousness over the government's long-term fiscal position and have warned that the stimulus package should not worsen this outlook and thereby risk pushing long-term rates higher. Increased long-term rates would dampen economic activity and undercut some of a recovery package's stimulative effect.

It is worth noting that the Committee for Economic Development, an organization of leading corporate executives and university presidents, has just issued a report warning of long-term fiscal difficulties and pointing to the gradual phase-in of provisions of the tax cut as providing a possible budgetary safety valve, since tax cuts could be deferred or removed before taking effect. The Administration's plan would weaken this safety valve.