Stimulus bill is only 64% stimulation

The art of compromise is making all sides equally unhappy with the result. The good news is that something resembling an economic stimulus package is ready to go President Obama's desk. The bad news is that it contains significant amounts of tax cut pork. Tax cuts don't stimulate, since people generally save them. But the good news is that the other 64% of the bill is likely to lead to spending, much of which is the most prized kind of all -- investments that last once the government spigots are turned off.

The final bill includes $507 billion (64% of the total) in spending programs and $282 billion in tax relief (the remaining 36%). Here's some of the good news: a dollar in state government aid to kill cuts in services or layoffs yields $1.36 in total economic payoff, and a dollar in infrastructure investment yields $1.59. By contrast, as I posted, when people get tax cuts, the savings rate spikes. That's particularly true when the tax cuts come during periods of economic distress. So those cuts are vote-buyers that unfortunately represent $282 billion in missed opportunities to stimulate.

Of the $507 billion that's not tax cuts, my favorite part is the investments that produce jobs in the short run and assets in the long-run that generate future revenues or cost savings, such as insulating government buildings to save the Federal government $2 billion a year through more efficient energy use. Such investments are part of the $150 billion in public works projects for transportation, energy and technology.

There are other parts of the package that will help people but are hard to see as investments. These include:

  • * $87 billion to help states meet rising Medicaid costs;
  • * $6.5 billion for medical research; and
  • * A one-time payment of $250 to recipients of Social Security and government disability support -- which could potentially get spent.

Then there are the tax cuts which I see as non-stimulative. These include the following:

  • * $70 billion tax break to spare millions of middle-income Americans from paying the alternative minimum tax in 2009; and
  • * Credits of up to $400 for individuals and $800 for families within certain income limits.

More details should emerge in the next few days. But how should the package's success be measured? The most important ways: Do companies hire workers to complete the projects in the package? Do consumers spend the money on goods and services? If those two things start to happen, we could get a decent return on our investment in this plan.

The big unknown is whether this plan will restart economy activity so the economy can function on its own after all the plan's money has been spent. But I think Obama did the right thing by acting fast. If we can raise the money to pay for this deficit booster, we can always add to the plan if needed after assessing which parts worked well and which did not.

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.

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