My letter to the President-Elect!

[Karl_Bonner_1982]

I sent it via Change.gov, but I may mail a copy too. The stimulus plan won't hit the desk for a couple weeks at least.

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Dear Mr. President-Elect,

I am thankful for your plans to pass and sign an approximately $850 billion stimulus plan shortly after taking office. This stimulus plan is vital to providing an increase in economic activity when private investment and consumption are lagging. However, due to the severity of the recession, it is crucial that the total stimulus be larger – both in quantity and quality – than the plan proposed so far.

The economy is expected to perform at $1 trillion below “normal” output (potential GDP growth) for at least the next two years, possibly staying well below potential through 2011 and beyond. This means that a lag of more than $2 trillion exists. As many economists including Nobel winner Paul Krugman have noted, the multiplier on infrastructure spending is roughly 1.5, meaning that every $100 billion in public works projects increases GDP by $150 billion. In order to increase GDP by $2 trillion over two years and close most (but not all) of the output gap, we would need a stimulus of at least $1.33 trillion, assuming that all of the expenditures have a 1.5 multiplier.

Business tax cuts have been rightly criticized as having a much lower multiplier, possibly as low as 0.5. They are a much less efficient tool for creating short-run expansion of the economy. Infrastructure spending not only has a large multiplier for creating a Keynesian stimulus, but it will boost the supply side more by lowering shipment- and transportation-related costs over the longer run.

My biggest concern is that the current stimulus plan will not be nearly strong enough and will leave the unemployment rate at 7 percent or higher by 2011. With the economy still fairly weak, conservatives will then have free rein to attack fiscal policy as being ineffective, potentially jeopardizing the Democratic Party’s political advantage in the 2010 and 2012 elections. What is worth doing is worth doing thoroughly, and I believe that an adequate fiscal recovery plan can help to vindicate the ideas of interventionist economics, paving the way for a stronger progressive agenda in the near future.

I thus recommend that either:

1. The current stimulus plan should be greatly expanded to at least $1.2 trillion by adding another $350-400 billion in infrastructure and state/local aid (such as K-12 and college block grants as well as funding for construction of a national high-speed passenger railway system!). In addition, business tax cuts such as the credit for retraining and hiring should be reduced or eliminated from the proposal since it has a low multiplier effect and could be better spent on infrastructure and aid;

or

2. Congress and your Administration should stand poised to pass a second recovery plan sometime between this summer and early next year, possibly adding another $400-600 billion in high-multiplier outlays.

As a final note, while the $1.2-1.4 trillion plan I am proposing will add considerably to the budget deficit, the extra tax revenues generated by higher economic performance will partially offset that deficit. If the stimulus is too large and the economy begins to overheat in two or three years’ time, monetary policy and tax increases can be used to cool the boom down.

Thank you for considering these very important ideas.

With hope,



Eric N. Gross
Senior Undergraduate Economics Student, B.S. University of Oregon