Monday, February 04, 2008
Economic Stimulus: Bang for the Buck
Fiscal stimulus has been the hot topic in Washington for the past several weeks. The House already passed a stimulus package created with the input of the White House, and the Senate will take up consideration this week. We will likely see a stimulus package hit the President’s desk very soon, with a good chance that he will sign it.
Unfortunately, in the rush to build consensus on a stimulus package, Congress jettisoned an important method of stimulus that has the potential to be most effective: direct government payments to individuals, which could come in the form of an increase in food stamp benefits or an extension of unemployment insurance. Not only would an increase in these programs provide much-needed support to low-income families, who are likely to feel the impact of an economic downturn most deeply, but according to economists, they would provide the swiftest impact on the economy.
When measuring “bang for the buck”, or how much economic activity is generated by spending on certain policies, food stamps and unemployment insurance come out ahead, according to the industry research firm Moody’s Economy.com. For every dollar spent on the food stamp benefit, $1.73 is generated throughout the economy in what economists call the ripple effect. $1.64 is generated for every dollar spent on unemployment insurance.[1] And unlike tax breaks, which individuals may use to pay down debt or increase savings, recipients must spend additional food stamp benefits, quickly infusing money into the economy.
In testimony before the Senate Finance Committee, Peter Orszag, Director of the non-partisan Congressional Budget Office stated, “The most effective fiscal stimulus polices share two common features: they focus on the time period when stimulus is most likely to be needed, and they are designed to increase economic activity as much as possible for a given budgetary cost.”[2] He went on to site food stamp increases and unemployment insurance extensions as the only two proposals currently being considered that are both fast acting and highly effective stimulus.
It appears unlikely that food stamps and unemployment insurance will be a part of the first stimulus package sent to the President. There are rumors that a second round of stimulus will be considered later in the year. Let’s hope that the passage of a bill does not mark the end of the discussion.
[1] “Food stamps offer best stimulus – study.” CNN Money.com, 29 January 2008.
[2] Statement of Peter R. Orszag, CBO Director, “Options for Responding to Short-Term Economic Weakness.” Before the Committee on Finance, United States Senate, 22 January 2008.
Unfortunately, in the rush to build consensus on a stimulus package, Congress jettisoned an important method of stimulus that has the potential to be most effective: direct government payments to individuals, which could come in the form of an increase in food stamp benefits or an extension of unemployment insurance. Not only would an increase in these programs provide much-needed support to low-income families, who are likely to feel the impact of an economic downturn most deeply, but according to economists, they would provide the swiftest impact on the economy.
When measuring “bang for the buck”, or how much economic activity is generated by spending on certain policies, food stamps and unemployment insurance come out ahead, according to the industry research firm Moody’s Economy.com. For every dollar spent on the food stamp benefit, $1.73 is generated throughout the economy in what economists call the ripple effect. $1.64 is generated for every dollar spent on unemployment insurance.[1] And unlike tax breaks, which individuals may use to pay down debt or increase savings, recipients must spend additional food stamp benefits, quickly infusing money into the economy.
In testimony before the Senate Finance Committee, Peter Orszag, Director of the non-partisan Congressional Budget Office stated, “The most effective fiscal stimulus polices share two common features: they focus on the time period when stimulus is most likely to be needed, and they are designed to increase economic activity as much as possible for a given budgetary cost.”[2] He went on to site food stamp increases and unemployment insurance extensions as the only two proposals currently being considered that are both fast acting and highly effective stimulus.
It appears unlikely that food stamps and unemployment insurance will be a part of the first stimulus package sent to the President. There are rumors that a second round of stimulus will be considered later in the year. Let’s hope that the passage of a bill does not mark the end of the discussion.
[1] “Food stamps offer best stimulus – study.” CNN Money.com, 29 January 2008.
[2] Statement of Peter R. Orszag, CBO Director, “Options for Responding to Short-Term Economic Weakness.” Before the Committee on Finance, United States Senate, 22 January 2008.
