S&P chief economist David Wyss weighs the pros and cons of the $789 billion package
From Standard & Poor's RatingsDirectThe 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.
If you look at spending on the states, some that are really in fiscal trouble—such as California, with its $42 billion budget shortfall—are set to get less money per capita than states that are in less dire straits.
And some spending items are going to be hard to remove—the aforementioned health-care benefits among them—and will probably end up being permanent fixtures.
A major point of contention during Congressional negotiations over the plan was the split between spending and tax cuts—the latter of which, it turns out, accounts for about one-third of the final package. How stimulative will these tax cuts be?
I think the personal tax cuts will likely lead to more spending, but one problem is that much of what we tend to buy comes from outside the U.S. The impact on U.S. employment is, thus, blunted.
Corporate tax cuts aren't likely to achieve much at present, since investment incentives don't create much additional spending when capacity utilization is this low. Even subsidized investments don't work well when 30% of your current capacity isn't being used.
Does the chance that many Americans will save all, or part of, the tax rebate included in the package present a problem?
The tax rebate is being done differently than the Bush Administration's. This time around, it involves adjusting the withholding schedule, which spreads it out rather than giving people one lump sum. The drawback to that is there won't be one quick surge. The benefit is that people may spend more along the way. Psychologically, consumers may be more likely to spend the much smaller amount on meals outside the home, for example. In contrast, they might have been more inclined to put a lump sum of a few hundred dollars into their savings accounts or pay off a credit card.
Was getting the bill through the House and Senate in a timely fashion worth the tradeoffs?
The concessions aren't that major—and yet I worry that the package doesn't deliver as much for the buck as it should. Timeliness is critical. But if you look at [head of the White House's National Economic Council] Larry Summers' three key objectives—to be timely, temporary, and targeted—to a significant degree, we seem to have forfeited the latter two.
You've said that the U.S. deficit—though large, growing, and undesirable—is better than an alternative that includes economic collapse. But is there a point of critical mass? Does the stimulus package leave any wiggle room, or will we soon be at maximum deficit capacity?
It's hard to see how we can get much bigger than $1.6 trillion for this fiscal year and the $1.2 trillion we expect next year. I wouldn't want to see the U.S. running a much bigger deficit than that.
At the same time, we've learned from the mistakes the Japanese government made in the 1990s, when it dumped money into infrastructure, but failed to do much for the economy as a whole because its program came in fits and starts. I think the U.S. needs to be a bit steadier, with sustained spending for a few years, to have any long-term measurable impact. That would have been an advantage of concentrating more on infrastructure spending.
Is the money set aside for Detroit's auto companies more about job retention or the long-term viability of the companies themselves?
This is obviously a temporary fix. I think the Administration is hoping to keep the U.S. auto industry alive long enough for the car market to revive and the companies to become healthier.
Given S&P's view that the TARP has been more successful than many reports suggest, what is the likelihood that we'll be saying the same about the current stimulus package in a few months' time?
I think the effects of this package are going to be somewhat limited. I do think that we need it to get the economy going, but it's not going to solve all the world's financial problems. The retrospective view of the plan may depend on our current expectations as much as anything else. As long as we don't expect a panacea, our satisfaction could be high.