Obama's Stimulus Plan: Hits and Misses

S&P chief economist David Wyss weighs the pros and cons of the $789 billion package

From Standard & Poor's RatingsDirect

The compromise $789 billion U.S. economic stimulus plan, in conjunction with last year's $700 billion Troubled Asset Relief Program (TARP), represents what Standard & Poor's Ratings Services believes to be the most ambitious effort in U.S. history to rebuild the financial health of millions of individuals and businesses, both in America and around the world.

President Barack Obama's Administration has said it is moving quickly to try to reverse the recent contraction in the U.S. economy, to combat rising unemployment, and to bolster a battered stock market that has shrunk Americans' retirement savings. But as we expected, the stimulus package may turn out to be only part of what is needed. In our view, the new Administration and Congress must first stabilize, then revitalize, faltering banks and stalled credit markets.

In the following series of questions and answers, Standard & Poor's Chief Economist David Wyss explains which parts of the stimulus package he thinks will be most effective, and which may fall short.

You've said that job creation and the revival of lending are important objectives of the package. What can we expect in both cases?

Reviving the financial markets is more a function of the TARP, but some elements in the current stimulus package should help. For example, the $8,000 tax credit for first-time home buyers may help resuscitate the housing market.

With regard to employment, the U.S. has already lost 3.6 million jobs, and we at Standard & Poor's expect to see another 3 million lost this year. The current package is supposed to create about 3.5 million jobs—so it's not a total offset. The Administration hopes this will stabilize the job market and eventually spur the private sector to create jobs.

What's not there that, in your view, would have made the bill stronger?

It's not necessarily that the package is lacking a particular element, but rather that it lacks sufficient focus. Much of what is being allocated comes as general grants, which may or may not generate additional spending. For example, extending health-care benefits for the unemployed—while extremely useful in helping to mitigate the effects of the recession on those hardest hit—is not really stimulus. And we'll have to see whether business tax cuts and the grants to states will stimulate spending, or whether the recipients will simply use the money to replenish their coffers.

Another issue to analyze is where the money is being spent. The original idea was to concentrate on infrastructure, which I think would have been ideal. The deferred maintenance on the nation's infrastructure is becoming a serious problem, it seems to me, and if the funds were concentrated on repair, spending could have been done quickly. But the modest infrastructure program in the plan is now largely focused on new highway projects that take longer to get up and running, rather than on maintenance.