What is the Republican alternative to the stimulus?

Posted By Philip Zelikow Wednesday, January 28, 2009 - 11:22 PM Share

By Philip Zelikow

The Republican leaders in Congress have not yet been able to offer an effective alternative to the Obama administration's fiscal stimulus package. The responses so far look like general unease about big government, mocking particular spending ideas, and calling for more tax cuts. Thus the administration's approach looks earnest and coherent, even if flawed. The Republicans are just nipping at the margins. The dogs will bark; the caravan moves on.

Republicans should do better. Their congressional leaders should develop a package that, while not endorsed by the whole caucus, might enjoy a significant and critical spectrum of support -- putting Republicans at the center. After all, experts as varied as Alice Rivlin and Jeffrey Sachs have now weighed in publicly with serious expressions of unease about the emerging package.  Surely Republican leaders (acting as a kind of shadow government!) can see an opening to offer a creative, coherent alternative. 

Here are some illustrative elements. Warning: Some of these are bound to make many individual Republicans unhappy, yet they add up to four messages:

1. Where the administration puts the financial crisis in second place, the Republicans will offer bipartisan answers to put the banking and housing crisis first.

  • Another major federal effort to help banks, including debt for equity possibilities.
  • Let bankruptcy judges redo mortgage terms. The banking industry will hate this. Most ordinary Republicans, and Democrats, will like it. They want to help citizens who will come to grips with their problems and resent that the creditors haven't been able to come to the table and deal.

2. Where the administration is acting unilaterally, belying its internationalist rhetoric, the Republicans prefer a global answer to a global crisis.

  • Coordinate U.S. financial and fiscal answers in a global setting, with China and other surplus countries doing their part, using the April 2009 G-20 meeting as the target for a set of real initiatives, not like the November 2008 show horse. Show the world that the responsible stakeholders of an open world economy will "man up."
  • Pick up World Bank president Robert Zoellick's suggestion that 0.7% of the stimulus plans in all countries be dedicated to funds that will expand availability of global credit. Show that globalization will be sustainable, despite this crisis.

3. Where the administration is treating serious investments in our infrastructure as a form of "helicopter money," the Republicans are ready to address real needs.

  • But don't do investments in a rushed, fragmentary way, opening up long-term obligations with no plan for how to sustain them.
  • And don't treat the creation of new entitlement programs as "stimulus," unless there is some plan that automatically cuts them off after 2010.

4. Where the administration thinks we can borrow our way out of a debt problem, the Republicans want to restore confidence in our fiscal strength and long-term economic health.

  • Allow the Fed to be a lender of last resort to state and local governments, at concessionary terms. Thus the Fed can make up for balky municipal bond markets while still obliging state and local governments to take the policy lead, coming up with creditworthy proposals.
  • Cut payroll taxes, offset by a tax penalizing greenhouse gas emissions (as the CEO of ExxonMobil recently proposed, as well as Lawrence Lindsay and others). The net effects should be very positive, especially for the current account deficit over the long haul.

Folks may like or dislike each of these ideas. But they sure do not fit a preconceived ideological cookbook. This is real pragmatism. 

If asked how much this alternative would cost, there is an honest answer:  There is no arbitrary target because the spending is not motivated by the desire to reach one. But the net spending will be much less, probably less than half as much in 2009. There will be a big federal effort to help banks that should be mostly repaid when financial paper is resold to private hands. The federal government will offset temporary state and local borrowing weakness. It will make some substantial and overdue public investments and reallocate tax incentives in a more sensible way. It will be coordinated with other major economic powers. 

The net effect is show solidity, not desperation; sustainability, not a quick fix. Global, not unilateral. Those are the themes that will restore the confidence of Americans and of investors around the world. Our recovery, and our national security, may depend on it.

EXPLORE:ECONOMICS, GLOBALIZATION, OBAMA ADMINISTRATION, U.S. FOREIGN POLICY
 
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D-BOY

5:18 PM ET

January 29, 2009

Rush Limbaugh wing

These are all really good suggestions but the problem is the Republican party is run by the Rush Limbaugh wing which has no interest in anything beyond tax cuts and gay marriage. If the Republican party was run by the Philip Zelikow wing then maybe the Republican's can offer some alternative

 

KYLE L

10:43 PM ET

January 31, 2009

Some Questions

Professor Zelikow, these are interesting, productive suggestions, and I share the previous commenter's frustration that the Limbaugh wing has prevented Congressional Republicans from offering a real alternative to the Obama stimulus bill (unless you believe the fabricated data about a pure tax cuts bill being able to create millions of new jobs).

I just have a couple of naive but honest questions:

1. Aren't Dems and the Obama administration specifically already working on helping banks/the U.S. banking system in a separate plan or bill?

2. There is no doubt that coordinating a global response would be ideal. But is it even remotely realistic? Even within the United States, we cannot agree on not just details but also the foundational starting points for dealing with the crisis. What makes you think that this would be any easier when also dealing with the disparate interests and opinions of more than a dozen foreign governments? Second, was the November 2008 G-20 meeting only a 'show horse' because President Bush was a lame duck, or might it also have been due to the fact that these leaders realize that they cannot possibly come to a consensus on the revolutionary changes in global economic institutions and practices that would be needed? After all, what happened to all of those initial speeches for a 'new Bretton Woods'? I haven't heard that expression come out of a prominent leader's mouth for a number of weeks or even months now. Finally, phrases like "with China and other surplus countries doing their part" suggest to me the kind of international approach Republicans would likely take, and it looks a lot like the Bush administration's stance on Kyoto and other environmental issues. While an 'everyone must do their part' approach certainly seems fair (at least to me), 'fairness' hasn't made such an approach any more successful in recent years. What would be different here?

3. I've heard a lot about cutting payroll taxes, but not a lot of evidence that this will significantly stimulate consumer spending. Specifically, I've read from a number of sources that payroll tax cuts are likely to primarily benefit the very poor and very wealthy, both groups that are unlike to spend the money, or at least unlikely to spend it in ways that would stimulate the economy.

Again, I'm just looking for honest answers. Because until I hear about a realistic, major alternative to the Obama plan, I'm inclined to support the Dem spending bill. At least they're attempting to turn things around with a detailed and 'doable' plan!

 

Shadow Government is a blog about U.S. foreign policy under the Obama administration, written by experienced policy makers from the loyal opposition and curated by Peter D. Feaver and William Inboden.

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