Friday, January 16, 2009

Highlights of the Recovery Plan

From the WSJ:

Highlights of Economic Recovery Plan
$32 billion Funding for "smart electricity grid" to reduce waste
$20 billion + Renewable energy tax cuts and a tax credit for research and development on energy-related work, and a multiyear extension of renewable energy production tax credit
$6 billion Funding to weatherize modest-income homes

Science and Technology
$10 billion Science facilities
$6 billion High-speed Internet access for rural and underserved areas

$32 billion Transportation projects
$31 billion Construction and repair of federal buildings and other public infrastructure
$19 billion Water projects
$10 billion Rail and mass transit projects

$41 billion Grants to local school districts
$79 billion State fiscal relief to prevent cuts in state aid
$21 billion School modernization

Health Care
$39 billion Subsidies to health insurance for unemployed; providing coverage through Medicaid
$90 billion Help to states with Medicaid
$20 billion Modernization of health-information technology systems
$4 billion Preventative care



* $500 per worker, $1,000 per couple tax cut for two years, costing about $140 billion
* Greater access to the $1,000-per-child tax credit for the working poor
* Expansion of the earned-income tax credit to include families with three children
* A $2,500 college tuition tax credit
* Repeal of a requirement that a $7,500 first-time homebuyer tax credit be paid back over time


* An infusion of cash into money-losing companies by allowing them to claim tax credits on past profits dating back five years instead of two
* Bonus depreciation for businesses investing in new plants and equipment
* Doubling of the amount small businesses can write off for capital investments and new equipment purchases
* Allowing businesses to claim a tax credit for hiring disconnected youth and veterans

Let's review where we are.

According to the latest Beige Book things are pretty grim. This information is confirmed by the latest FOMC Minutes release. That means we are in a situation where we should do something. The proper question then becomes, what?

On one side, the Federal Reserve has been doing everything it can (and then some) to keep the financial sector afloat. The Fed has expanded its balance sheet enormously to deal with the financial crisis. Whether or not you agree with that expansion is a different question than whether or not it has been effective. The answer to the latter is yes -- credit spreads have come down. Lending won't return to pre-recession levels for awhile because, well, we're in a recession when lending naturally slows down anyway.

Then we have the consumer side of the equation which is in terrible shape. The US economy needs an active consumer, which is responsible for about 70% of out economic growth. But those expenditures have not been coming as fast lately. In fact -- the US consumer is pretty much going on strike right now:

Click on both for a larger image

The main goal is to increase consumer demand through government spending. The logic goes like this: the government spends more money. In spending this money they hire people to do things either directly (by directly hiring them) or indirectly (by having government contracts go to private firms who then hire people etc...). This puts more money in people's pockets which they in turn go out and spend.

The big question is will it work? The basic GDP equation (consumer spending + investment + exports + government spending = GDP) says so. But it's important to remember that the best laid plans of mice and men can run afoul too. In other words -- this is not a guarantee and should not be sold as such. There are still a ton of risks involved with this move.