After Obama signed his $787 billion stimulus package last Tuesday, UNH professors sounded off on the advantages and the burden the package entails.
"It is definitely needed," said Zeynep Senyuz, assistant professor of economics. "This is mainly because conventional monetary policy lost its effectiveness in the current situation.
"The economy is in a liquidity trap. Banks are hoarding cash and are reluctant to lend," Senyuz said. "The U.S. consumer is heavily battered by the reduction in its net worth and this does not leave much room for stimulating consumer spending by lower interest rates.
"So, fiscal policy seems to be more important than it ever was in the last 30 years," she added. "Even fiscally conservative economists agreed that it is needed to pull the economy out of the current recession."
Passed in record time, the $787 stimulus package, known as the American Recovery and Reinvestment Plan, could increase employment by a range of 800,000 to 2.3 million by 2009, and 1.2 million to 3.6 million by the end of 2010, according to the non-partisan Congressional Budget Office.
"It will help by creating the demand that is needed in the economy as a result of lacking investment and consumption expenditures," Senyuz said.
According to the White House, the bill includes $288 billion in tax relief, while the remaining $499 billion will be in government spending-most of which will go to State and local fiscal relief, infrastructure and science, healthcare, education, and energy.
"Lower taxes mean more disposable income. Due to the increase in disposable income, we expect the demand to be higher which would lead to increase in production," Senyuz said.
But according to Senyuz, there is a risk that the tax cuts will backfire. In the current economic situation, she said, the average American household is in so much debt, and people on average, will use the money to pay off debt.
"Economic theory tells us… [that] for a desired increase in output, the required amount of tax cuts is higher than the required amount of increase in government spending."
Senyuz also said that the advantage of government spending is that it will strengthen the weak demand directly.
"I believe that government's role is critical. Government expenditure in the form of infrastructure, and cash transfers to the states are most likely the best ways to simulate the economy in the short-run."
"The disadvantage is further increases in the budget deficit which is already high," she said.
But political science professor and Director of the Survey Center Dr. Andy Smith is not as hopeful and much more concerned with the budget deficit.
Inflation
"I'm not optimistic that the stimulus is going to do anything-except increase debt a tremendous amount, and raise a really significant amount of inflation in five years," Smith said.
"Even the Congressional Budget Office said that after 10 years, the economic stimulus package will lower economic growth overall, than if we did nothing at all," he said.
"Most people don't remember how bad inflation is. It's a tax on everything you own, and you get taxed on everything you do."
But Senyuz said that inflation is not a major concern for the short-run.
"Actually some inflation would be helpful to stimulate the economy in the current situation. Deflation is a lot more dangerous in this environment," she said.
With federal interest rates near zero, the Federal Reserve cannot cut rates much further to fight deflation, whereas government spending may boost inflation later, creating an incentive to spend now, according to a recent study by New York Federal Reserve economist Gauti Eggertsson.
Stimulating an Economy?
But Smith, citing research by economists on nineteenth and twentieth century recessions, said that fiscal stimulus does not stimulate economic growth.
"In my opinion, which is also the Economist's, there is very little the government can do to stimulate the economy," he said. "The only thing that can actually do anything is reducing small business taxes."
"These businesses will invest that money and get extra money so they can hire more people, and which will create job growth," he said. "That's a little bit better than nothing, but not much better nothing."
Smith also said that much of the plan's $288 billion in tax relief is not going to people who are likely to invest money into businesses or new sources of job creation.
"It's just going to people who spend money… but not doing anything to grow the economy or stimulate job growth," he said.
"Don't just do something, stand there!"
Smith said that most of the Stimulus bill is motivated by politics, from both sides of the aisle.
"The best thing to do is nothing," Smith said, regarding the recession. "But this is not a politically acceptable position to have."
"The politics of it are more important; people's perceptions of it as working or not. Congress has much more short terms goals, which are a lot more parochial. A lot of it is for local spending projects that congressmen have had sitting on the shelf until they had an opportunity to spend it," he said.
So has Obama lived up to his campaign promises, bipartisanship and transparency?
"Congress does not work in a bipartisan manner," Smith said, "…the goal was to get it through before anybody notices. If this was currently a stimulus package that the White House and Congress were proud of, they would have let it be seen by the public."
"There are already complaints about some specific things that have been submitted, and I think we're going to hear a lot of stories in the next couple of weeks of the things that the money was spent on," Smith said.
Despite negotiations of the bill behind closed doors, the White House has released a new web site, recovery.gov, where the public can read where taxpayer money goes, perhaps in an attempt to be more transparent.
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