Which forms of stimulus provide biggest return?

Thu, Jan 8 2009, 17:38 GMT
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Jan 8 (Reuters) - President-elect Barack Obama offered up a few more clues on Thursday about what sorts of programs he would like to see in a record-large economic stimulus package.

In a speech in Fairfax, Virginia, Obama said he intended to invest in energy, education, health care and infrastructure. He did not put a price tag on the stimulus plan, but his economic team has been eyeing a package in the $675 billion to $775 billion range, and it could move higher.

It will probably take until early February for Congress to hammer out the details, but economists already are weighing in on what types of spending generate the biggest economic returns.

Here are some of their ideas on proposals that are likely to be part of the stimulus package.

TAX CUTS:

Obama campaigned on promises for a middle-class tax cut, and said on Thursday that 95 percent of working families would receive a $1,000 tax break. He also proposed extending benefits and health care coverage for the unemployed. The total tab for tax cuts may reach $300 billion.

Lowering taxes puts money in consumers' pockets quickly, but economists worry that with uncertainty running high, many households will choose to save rather than spend the money. While most economists would like to see the U.S. saving rate rise from its current low level of 1.2 percent, a sudden jump in savings would deepen the recession.

Many economists are pushing for targeted benefits such as food stamps or extending unemployment benefits. Mark Zandi, chief economist at Moody's Economy.com, estimates that every dollar dedicated to increasing food stamps puts $1.73 into the economy. Increasing jobless insurance benefits typically gets a return of $1.64 per dollar. (http://www.economy.com/mark-zandi/documents/assissing-the-impact-of-the-fiscal-stimulus.pdf)

Obama also is expected to support tax cuts for businesses, which would raise corporate profits and may help the stock market. Unless the economy recovers quickly those tax reductions would probably do little to encourage companies to step up hiring and investment, Deutsche Bank economist Peter Hooper said.

INFRASTRUCTURE SPENDING

Obama has promised the nation's largest-ever public works program to help boost the economy and create jobs. Economists generally favor infrastructure spending, but the downside is that it takes longer to pay off and can miss its mark if political interests lead to too many unnecessary pet projects.

Obama acknowledged such concerns in his speech, urging Congress to "put the urgent needs of our nation above our own narrow interests."

Zandi estimates that infrastructure spending returns $1.59 for every dollar spent.

In congressional testimony last year, Zandi said tax cuts delivered the least bang for the buck, with a dollar's worth of temporary nonrefundable rebates worth $1.02 with a one-year lag. Permanent tax cuts yielded less than 50 cents of additional spending.

AID TO STATE GOVERNMENTS

State budgets have taken a huge hit from falling property and sales tax revenues, and governors have urged Obama to help. According to Zandi's estimates, the return on that investment is $1.36 per dollar spent.

Adam Posen, an economist with the Peterson Institute for International Economics, said helping states bridge budget gaps would help keep teachers and police officers on the job. (http://www.iie.com/publications/papers/pp20081222posen.pdf)

The more people stay in their jobs, the more they are able to pay mortgages, auto loans and credit card bills, and the more likely they are to continue spending.

For a story on Obama's speech on the stimulus plan, please click on.

(Reporting by Emily Kaiser, Editing by Andrea Ricci) Keywords: USA OBAMA/STIMULUS

(emily.kaiser@thomsonreuters.com; +1 202 310 5444; Reuters Messaging: emily.kaiser.reuters.com@reuters.net)

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