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ECONOMY

Getting the U.S. economic stimulus right is the challenge

The stumbling U.S. economy may need a stimulus plan, but making it effective is the great challenge.

sandron@MiamiHerald.com

The federal government is talking about spending $825 billion on a package of tax cuts, public-works projects and other spending programs, in hopes of giving the economy a kick that will get it moving again.

How well will it work?

Most economists interviewed said the program could help -- if it's timely, temporary and doesn't get overtaken by wasteful pork-barrel projects.

The trouble is, those are big "ifs." The plan carries substantial risks, and there is a number of ways politicians can screw this up.

The plan unveiled by House Democrats on Thursday includes $275 billion in tax breaks and $550 billion in spending.

The proposal includes a wide range of projects, such as at least $48 billion worth of roads, bridges and mass transit improvements, $36 billion to expand and extend unemployment benefits, $16 billion to repair and upgrade public housing, $14 billion to repair and modernize schools, and $87 billion to help states pay for ongoing Medicaid costs.

The biggest risk with the plan may be its cost. The $825 billion price tag comes after the $700 billion bank bailout, the war in Iraq, and the tax cuts passed during the Bush administration without accompanying spending cuts.

All of this comes at a time when the nation faces the upcoming retirement of the Baby Boom generation, which is expected to convert millions of productive, taxpaying workers into retirees collecting expensive Social Security and Medicare benefits.

Sean Snaith, an economist at the University of Central Florida, called this a ‘‘nightmare slowly chugging down the demographic tracks."

Economists say it would be ideal if the public could somehow be sure that the government would stop the extra spending when the crisis is over. That way, we could be sure the national debt won't continue to swell.

Which brings us to the next risk with the stimulus plan: It relies on the premise that the government will shrink itself when the recession is over.

Some economists find that hard to imagine.

"Things in the government sector just don't shrink," said Don Bellante, an economist at the University of South Florida in Tampa. "The contractors who get the jobs want to keep getting them. Congress will be responsive to these people. These are people important to them in keeping their own jobs."

One way to keep the spending increases from becoming permanent is to spend as much of the money as possible on one-time projects like highways. Unfortunately, this conflicts with another goal of the plan: getting the money into the economy quickly.

Some economists say the government needs to act quickly, or the money may not actually get spent until after the crisis is over. (In a classic case, President Kennedy proposed a tax cut to address a recession, but it didn't pass until 1964, years after the recession had ended, and months after the president himself was assassinated.) Showing up too late could translate to more than just a missed opportunity. Combined with the Federal Reserve's decision to make money cheaply available to banks, a stimulus during an economic recovery could provoke severe inflation. Other economists consider this argument unpersuasive because this recession seems likely to linger and because demand for merchandise is so weak right now. While some worry about the prospect of a late-arriving stimulus package, others worry about the prospect of a package that shows up on time.

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