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Stimulus debate: Cash vs. infrastructure

The $600 rebate checks provided by the federal stimulus package earlier this year may have been popular among taxpayers, but many economists think any future effort should focus on infrastructure spending and other targeted measures.
/ Source: The Associated Press

The $600 rebate checks provided by the federal stimulus package earlier this year may have been popular among taxpayers, but many economists think any future effort should focus on infrastructure spending and other targeted measures.

Spending on new roads, bridges and other public works projects would create jobs and provide more of a lasting boost to the economy than another round of rebate checks, several economists said. They contend a common concern about infrastructure spending — that it takes time to gear up and may not kick in until after the recession is over — is less compelling now because the U.S. economy likely will experience an extended downturn.

"We're going to be in a longer period of weak growth and high unemployment" than was expected earlier this year, said Laurence Meyer, vice chairman of Macroeconomic Advisers and a former Federal Reserve governor. Any new stimulus needs to "have more legs" than the rebate checks, he said.

House Speaker Nancy Pelosi of California and fellow congressional Democrats are pushing a new stimulus package that could cost as much as $150 billion, though some economists think the total should be $300 billion or higher.

Federal Reserve Chairman Ben Bernanke boosted their efforts Monday when he said a stimulus package "seems appropriate" as the economy is "likely to be weak for several quarters" and there is "some risk of a protracted slowdown."

After Bernanke's remarks, the White House said it was open to additional action.

Still, other analysts cautioned that infrastructure spending is subject to political pressures that can make it less effective.

"You don't want to build more bridges to nowhere," said Brian Bethune, U.S. economist at the consulting firm Global Insight, referring to the infamous bridge in Alaska that connected a sparsely populated island to the rest of the state.

But Bethune said the package could include tax credits for companies that invest in wind, solar and other alternative energy, because the financing for many such projects has dried up due to the financial crisis.

Dean Baker, an economist and co-director of the Center for Economic Policy Research, also favors "green infrastructure" spending, such as providing funds for individuals and businesses that want to retrofit their homes and offices with more energy-efficient equipment.

Meanwhile, economists have mixed views about the effectiveness of the rebate checks, which were part of the $168 billion stimulus package that Congress approved in February.

The checks gave the economy "a sugar high" that faded as the financial crisis intensified and job losses mounted in August and September, said Peter Morici, an economist at the University of Maryland.

While some lawmakers have said Congress should return after the election to approve a stimulus bill, Pelosi said in an interview with The Associated Press last week that such a bill probably won't be considered until next year.

Most economists interviewed this week think a stimulus is necessary as the economy is expected to soon enter, if it hasn't already, a broad slowdown that has been made worse by the financial crisis and a sharp cutback in consumer spending.

Bethune forecasts that consumer spending will drop by 3.5 percent in the third quarter, the first quarterly decline in 17 years and the steepest drop since 1980.

Households likely will continue to cut back as the declining stock market has wiped out more than $8 trillion in household wealth, on top of the $1 trillion decline in home values, according to a report by Merrill Lynch economist David Rosenberg.

The recession could send the unemployment rate as high as 8.5 percent, Rosenberg wrote, up from its current level of 6.1 percent.

Such forecasts mean that any stimulus package should have a rapid and widespread impact, economists said.

Supporters of infrastructure spending argue that many transportation projects suspended due to a lack of funding could be quickly restarted. Many state and local governments have had to put such projects on hold as tax revenues have dwindled.

The American Association of State Highway and Transportation Officials estimates that 3,000 highway projects could begin within 30 to 90 days of receiving funding.

But some economists remain unconvinced a large stimulus is needed, given that the federal deficit is expected to increase sharply due to the $700 billion financial bailout approved earlier this month.

"I don't think we need a stimulus package — certainly not (as big as) $300 billion," said Allan Meltzer, an economist at Carnegie Mellon University.

At most, the government should address the excess supply of housing, Meltzer said, by providing a tax credit for anyone making a down payment on a house.