Congress Must Act to Keep the Economy Growing
July 31st, 2008
Recent reports of the budget deficit are troubling. Not because of the size of the deficit, indeed we had proportionally larger deficits in the eighties and nineties, but because talk of the deficit threatens to limit the measures Congress and the President are willing to take to turn this economy around.
There’s no doubt about it, we’re in the midst of a slow-motion recession, and it’s going to take more than one round of stimulus checks to get out of it. This is not to say that the stimulus checks were ineffective. They were the right thing to do, and while much of the data has yet to be collected, it appears they blunted the worst of the downturn to date.
President Bush would like to sit on his laurels at this moment and wait to see if everything gets better before passing another round of legislation to jumpstart the economy. This would be unwise. State budgets that began on July 1, 2008 contain sharp cuts in spending that will affect both the public payrolls and employment in health care and other services that rely on state government expenditures. These sectors were some of the only bright spots in the employment picture over the past year. From December 2007 to June 2008, the private sector lost 564,000 jobs. Our economy needs positive intervention now to help those who are suffering from rising prices, reduced hours and unemployment. And in the long run, Congress needs to address the structural problems that led to the last jobless recovery and the housing bubble.
In a new report, Slow-Motion Recession: What Congress Can Do to Help, we propose several immediate steps Congress can take to provide an economic stimulus of about
$100 billion to help the country address what may prove to be a long period of stagnation.
The proposals for stimulus include:
1. An expanded tax credit for homes and businesses to make energy conserving renovations ($15 billion);
2. Subsidies for state and local governments to reduce fares on public transportation ($7 billion);
3. Matching grants to state and local governments to invest in energy conserving renovations ($5 billion);
4. Grants to state and local governments so that they will not be forced to raise taxes and/or layoff workers and cut services in the middle of a downturn ($35 billion).
5. Additional payments to low- and moderate-income households through programs such as Food Stamps ($7 billion), School Lunches ($3 billion), and the Low Income Heating and Energy Assistance Program ($3 billion) to make it easier for families to cope with rising food and energy prices (total, $13 billion)
6. Modernization of the unemployment insurance system and further extension of the benefit period ($25 billion).
In order to ensure the soundness of financial markets, we argue that failures of both internal company governance and external oversight by regulators need to be addressed. Bailouts should include strict rules limiting leverage, requiring cash reserves against riskier assets, increasing transparency, and severely restricting executive compensation.
While it is difficult to identify movements in commodity prices that are due to unwarranted speculation, rather than to fundamentals, a modest tax on financial transactions would substantially raise the cost of this type of speculation while having very little impact on traders seeking to hedge in commodity markets or investors engaged in long-term investing.
Since the meltdown of the housing market is at the core of the downturn, we recommend reducing the number of homes on the market by passing Representative Raúl Grijalva’s Saving Family Homes Act. This measure would provide moderate-income homeowners facing foreclosure with the option to remain in their home as renters for up to 20 years. This measure would both provide housing security to these families and also give lenders a strong incentive to renegotiate mortgage terms to allow homeowners to remain in their homes as owners.
Finally, the paper suggests moving forward with measures, such as Family Leave Insurance and the Healthy Families Act, that would guarantee workers some amount of paid time off in case of illness. The United States lags badly behind other wealthy nations in ensuring its workers some amount of time off from their jobs to deal with family and medical needs. It is especially important in these challenging economic times that workers should not have to choose between a paycheck, or even keeping a job, and caring for their families.
Deficit or no deficit, this economic downturn requires that we think comprehensively about how we make our economy work again. The American consumer is strapped. Neither the strength of the stock market, nor the housing market, is going to pull us out of this malaise. We need Congress to take leadership and act.
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