Center for American Progress Action

A Practical and Progressive Economic Stimulus and Recovery Plan

A Practical and Progressive Economic Stimulus and Recovery Plan

Laura Tyson, John Podesta and Sarah Wartell present Congress with CAPAF's practical and progressive economic stimulus plan.

Our country faces a likely serious and possibly devastating economic downturn. Policymakers must act to stem the severity to the extent they can. Failure to come together to act quickly means that the economic pain will be broader and deeper than otherwise would be the case. Average American workers, who failed to benefit from economic growth in this last business cycle, will be amongst the hardest hit. And, if Washington cannot now take measures to address the short-term weaknesses in the economy, then the first years of the next Administration will be consumed by that challenge—leaving little capacity for progress on health care, the transformation to a low-carbon economy, and creating the conditions for long-term growth and economic opportunity.

Therefore, as congressional leaders consider measures to address the economic downturn, we suggest they craft a straightforward stimulus package with a limited number of components targeted on spurring demand and creating jobs. Each component should be timely, targeted, and temporary. And each should be bolstered by strong arguments that it will have powerful stimulative effect. In short, we urge discipline and focus in crafting a compelling and progressive package not susceptible to predictable ideological counter-arguments. We also urge firmness in rejecting conservative proposals that are neither stimulative nor targeted nor sound fiscal policy, regardless of their popular appeal.

While a number of ideas could satisfy the criteria above, below we recommend including the following stimulus proposals, many of which are already under active consideration:

  • Targeted tax rebates and food stamp benefits increases
  • State and local fiscal relief through HOME, CDBG and a Medicaid matching rate increase
  • Expansion of unemployment insurance benefits
  • Various measures to address rising energy costs, help increase energy efficiency, and create green jobs.

We also believe that the heart of any progressive economic recovery plan should be a very significant effort to stem the decline of home values, which is at the center of our vicious economic circle. Whether this housing market legislation moves in the same piece of legislation or on its own, we believe it must be at the very top of Congress’ and the President’s agenda for enactment early in 2008. CAP and CAPAF’s experts stand ready to assist any policymaker of any party, in any branch of government, in developing a housing market and stimulus package consistent with these principles.

While we do argue for a practical search for legislative common ground, we do not suggest that progressive policymakers shy from this opportunity to engage the battle over the future direction of our nation’s economic policy. This stimulus debate offers a tremendous chance to articulate a clear vision of what broader economic policies aimed at progressive growth could mean for the future of American economy, in stark contrast to where the economic policies of the Bush Administration have brought us today. (CAPAF’s affiliate, CAP, has published its recommendations for a new economic agenda for the next Administration in “Progressive Growth: Transforming America’s Economy through Clean Energy, Innovation, and Opportunity.”As our nation’s attention turns to the economy, a practical spirit of legislative cooperation does not preclude progressives from effectively telling the story of how the full flowering of ideological conservatism predictably produced a record of middle class squeeze and financial turmoil. We must tell the story of how we got here to ensure that we never return.

Over the last seven years, the traditional American pathways to economic progress for working Americans have been littered with roadblocks. Homeownership was the one exception that seemed to offer the prospect of wealth accumulation and a rising quality of life for both average and affluent Americans. But the failure to adequately regulate mortgage markets and provide financial market transparency created a bubble whose correction will be painful for all. Wasteful spending on an ill-conceived war, tax cuts disproportionately benefiting the wealthy, the failure to invest in innovation, infrastructure, and human capital, and negligent disregard of low savings and investment rates all leave us with weak fundamentals upon which to base a recovery. Progressives should use this opportunity to ensure that the economic consequences of conservatism, as reflected by the Bush Administration’s policies, is widely understood.


1. Proposals to Stem the Housing Market Decline and Protect Communities


Nothing policymakers could do in 2008 would be more important to the economic prospects of American families and the national economy than actions to stem the decline of home values. The key to short-term U.S. economic prospects is the housing market, which will inevitably suffer further serious decline over the next year. The only questions are how deep will be its fall and how severely will that drop affect other economic factors. Treasury Secretary Henry Paulson agrees that “the overhang of unsold houses will contribute to a prolonged adjustment, and poses by far the biggest downside risk [to the economy].” There is ample evidence that with each additional foreclosure in a neighborhood, house prices decline further, leading to a vicious cycle that ultimately brings our communities abandonment, blight, and crime. There are steps Congress should take to prevent unnecessary foreclosures, maintain demand for homes, keep housing inventory lower than it could otherwise become, stem the decline in home values, restore investor confidence in financial institutions, and enhance liquidity in the capital markets.

We do not suggest Congress try to prevent a market correction nor do we propose rewarding those who took imprudent risks. Investors, lenders, borrowers, and government all made mistakes that brought us to this point; all must share in the resulting burden. But without steps to stem the vicious circle and prevent dramatic house price depreciation, each and every American—and the long-term prospects for American economic growth—will suffer disproportionately and unnecessarily.

Congress should create a refinancing vehicle for creditworthy homeowners who cannot refinance because they owe more than the house is worth. Currently available programs do not address the needs of borrowers facing default and foreclosure who find themselves with negative equity in their homes as a result of local housing market declines. While many of these borrowers might be sufficiently creditworthy to refinance at a fixed rate, having otherwise reasonable debt-to-income ratios and a solid history of timely payments prior to reset, they will not qualify for any products available today, including FHA Secure and the HOPE NOW Alliance. And, as markets continue to weaken, the proportion of resetting loans in this “under water” category will grow.

Andrew Jakabovics of CAP initially proposed that Congress create the Family Foreclosure Rescue Corporation to refinance otherwise creditworthy borrowers who have no alternatives because of the negative equity in their homes. This FFRC proposal is based on the 1933 Home Owners’ Loan Corporation (HOLC) —a temporary market intervention that briefly refinanced almost 20 percent of the mortgage loans outstanding in the country and eventually was liquidated having returned a small surplus to the U.S. Treasury almost 20 years later. Representative Joe Baca has introduced H.R. 4135 based on this proposal.

Jakabovics’ original proposal called for the creation of a new government corporation to manage the transactions, in which the loan would be refinanced into a government guaranteed, above-market, fixed rate loan at a new loan balance based on the current value. But with $514 billion in loans scheduled to reset this year, of which 70 percent are subprime, we must act quickly to develop the program and gain market acceptance. Establishing a new program and agency will take too much time. Therefore, we must design a mechanism that would rely upon existing market players, the existing mortgage finance delivery systems, and familiar financial market instruments coupled with federal credit enhancement. We are working with Congressional staff and industry participants to explore various options.

A time-limited but broadly available mechanism to restructure large proportions of loans currently “under water” could restore economic confidence in the housing and financial markets, keep responsible and creditworthy homeowners in their homes, and allocate both shared responsibility and shared benefits to homeowners, investors, lenders, and the government. We urge Congress to work with the market participants and us to make designing a scaleable refinancing solution its highest priority. .

Congress also should provide significant support to state and local governments wrestling with declining tax bases and rising needs for community services; and help localities and nonprofits acquire and dispose of inventories of foreclosed properties.

Foreclosures and declining house prices have an impact that reaches beyond troubled borrowers and their neighbors. Municipalities are facing the double whammy of mounting costs for community services in declining areas, while also having to deal with reduced property tax receipts to cover expenditures. Whole neighborhoods of low- and moderate-income homeowners, most of whom never took out a subprime loan, face declining home values due to concentrations of foreclosures.

We recommend providing significant additional funds to states and localities to offset these increased costs and finance needed REO programs. Temporary increases in funding through the HOME and/or CDBG programs should be provided with a reduction or elimination of local matching funds requirements for these grants on a one-time basis. These funds, coupled with a credit enhancement provided by the financing program described above, could be targeted towards acquisition of vacant properties sitting on the market, deteriorating, and depressing local house prices. National nonprofits will develop scalable models that local governments and nonprofits can quickly adopt if there is sufficient capital available to finance these acquisitions. Converting some of the foreclosed properties into long-term affordable housing has additional benefits of creating employment in depressed communities and laying the groundwork for sustainable affordable communities. The Federal Home Loan Bank Board’s Affordable Housing Program authority also could be expanded as necessary to complement this effort efficiently.

In addition, meaningful legislation to prevent more unnecessary foreclosures should include HR 3609, the Home Ownership and Mortgage Equity Protection Act, a measure that would allow judicially-supervised loan modifications in Chapter 13 Bankruptcy payment plans for a limited group of families. Congress also must quickly send the President in this package legislation to expand mortgage revenue bonds, alter the tax treatment of home mortgage debt write- downs, and modernize the Federal Housing Administration.


2. Targeted Tax Rebates and Temporary Food Stamp Benefit Increase


A key part of a stimulus package should be cash to families to help them meet escalating energy and other living costs. Both targeted tax rebates and a temporary increase in food stamp benefits are timely, targeted, and temporary measures to sustain demand.

Targeted Tax Rebates

A tax rebate to families would have an immediate stimulative effect, because the dollars would be spent quickly and generate further economic activity. Any tax-based provision of this nature should be temporary and designed to provide rapid help to low- and moderate-income families.

The best way to provide these tax rebates would be through a single, flat, uniform amount. Providing all qualifying families a flat amount would be better than basing the rebates on individual tax liabilities. According to the Congressional Budget Office, “linking the size of the rebate to tax liability—such as returning a fixed proportion of taxes paid—substantially reduces the cost-effectiveness of the stimulus.”

Moreover, a flat amount would be administratively simple, could be implemented rapidly, and would minimize errors, confusion, or disputes about how amounts should be calculated. Providing the rebate to all families qualifying for the child tax credit or earned income tax credit as a straightforward way to target the funds fairly.

It is essential that the tax rebate be refundable—available to lower-income families that have little or no income tax liability—because such families have the greatest needs, and are likely to spend the funds most quickly on basic necessities, in ways that infuse funds into their communities. CBO has explained that “lower-income households are more likely to be credit-constrained and more likely to be among those with the highest propensity to spend. Therefore, policies aimed at lower-income households tend to have greater stimulative effects.”

Temporary Increase in Food Stamp Benefits

Unfortunately, low income people not in the tax system would not be reached by even such a targeted measure. Therefore, an economic stimulus package should also include a temporary increase in food stamp benefits.

The CBO recently noted that “the vast majority of Food Stamp benefits are spent extremely rapidly.” What’s more, explains the CBO, “because Food Stamp recipients have low income and few assets, most of any additional benefits would probably be spent quickly.”

The Food Stamp Program is the most logical vehicle to reach low-income families and individuals. There are 12 million participating households. The majority of participants are children and the elderly. Both low-income families with children and low-income couples and singles without children are eligible.

On average, participating households have income close to 60 percent of the federal poverty line, but 39 percent have incomes at or below half the poverty line. And 14 percent have no cash income at all. About 41 percent of participants live in a household with earnings. Thus, providing a temporary benefit to Food Stamp recipients would reach a very needy population, much of which would not be helped by a tax rebate. The fact that states already have existing mechanisms for Food Stamp issuances would mean that the benefit could be issued quickly and efficiently.


3. State Fiscal Relief


With shrinking tax revenues, state spending will contract without additional federal support for key services. We have already discussed above the value of a significant one-time increase in HOME or CDBG funds. Increasing the federal share of Medicaid costs is another way to provide some economic stimulus for those states and their citizens most directly affected by the immediate economic consequences of a recession. States could get this fixed, time-limited increase in federal funding only if they maintain existing Medicaid eligibility, which would ensure the increased aid flows to those people and states suffering the worst from the economic downturn. This proactive Medicaid policy would help preserve health coverage, jobs, and state financial stability—all of which are key to a quick economic recovery. Here’s how and why this policy would work.

Recessions affect health spending, especially in the states.

When unemployment goes up, so does the number of uninsured. Roughly two-thirds of Americans who become uninsured have lost employer-sponsored health insurance. Analysts suggest that a one percentage-point increase in unemployment results in 1.2 million to 1.5 million more uninsured.

Higher un-insurance also strains the health-care sector. An increase in the number of uninsured will result in greater uncompensated care and fewer health care jobs. More uninsured also increase the so called “hidden tax,” or the cost of uncompensated care that raises premiums for workers with health insurance. Given wage stagnation, this increase could cause people and companies offering health insurance to drop employer coverage. And as more people lose jobs and income, more people qualify for Medicaid.

Between 2000 and 2003, Medicaid picked up the slack from the decline in employer coverage. Over that period Medicaid coverage expanded to 19.9 percent from 18.9 percent—preventing 1 million more adults from becoming uninsured. But state budget deficits place the health care safety net at risk. At least 19 states anticipate budget shortfalls in the coming fiscal year and all are required to have a balanced budget. The upshot: When families most need safety net programs such as Medicaid, states may have no choice but to cut this program.

Raising federal Medicaid matching rates will maintain state health spending.

Medicaid is the largest source of federal funds to states. Maintaining state spending is one key to preventing a deep recession. The federal matching rate in Medicaid can be adjusted quickly: an increase can occur immediately, and can be turned off when the need subsides.

Historically, states have scaled back on Medicaid programs during budget crises. But doing so has broader negative economic “multiplier” effects. A recent Kaiser Commission study found that increasing federal Medicaid funding protects health care jobs and local economies.

Indeed, in 2003, a strongly bipartisan majority in Congress enacted—and President Bush signed—an economic stimulus package that increased the federal Medicaid matching rate by 2.95 percentage points for 15 months. States receiving this fiscal relief were required to maintain their Medicaid eligibility levels while the fiscal relief was in effect. The states used those funds to avert or limit proposed Medicaid cuts, avoid provider payment cuts, reverse previously implemented Medicaid cuts, and stabilize state budgets overall during the economic downturn. The policy worked.


4. Unemployment Insurance


Congress should include a temporary increase in unemployment insurance in the stimulus package. Unemployment is already rising. During a downturn, the number of unemployed is likely to grow, as will the length of unemployment spells. The increased needs will put greater stresses on state unemployment insurance programs, just as unemployed workers and their families will be struggling to pay their bills.

Expanded unemployment benefits are particularly effective as a stimulus because unemployment insurance recipients will quickly spend their benefits. A stimulus package should provide for an extension of benefits to those who otherwise face exhaustion.

Temporary provisions that also would broaden eligibility and increase benefits should be given strong consideration. In fact, the Congressional Budget Office “does not anticipate that many unemployed workers who exhaust their entitlement to regular benefits will be in states that will have met the criteria for triggering the extended benefit program in 2008." Thus further changes may be required to reach these people and maintain a base level of spending in the economies of states hard hit by job loss.


5. Help Consumers with Rising Energy Costs, Increase Efficiency, and Spur Green Job Creation


Rising energy costs act like a tax on consumer consumption and reduce demand in the economy. Congress should include measures in its stimulus package to help consumers cover higher energy costs, encourage energy efficiency measures that lower this implicit “energy tax,” and spur green jobs to support the crippled construction sector. Most of these green steps detailed below would not only act to strengthen the economy in the short term, but also move America toward a new low-carbon future and boost its long-term economic competitiveness.

Assist consumers, especially low-income and elderly consumers, with rising energy costs.

The first step would be to fund fully the Low-Income Housing Energy Assistance Program, or LIHEAP, to the level authorized by the Energy Independence and Security Act, which is $5.1 Billion in FY 2008. The “heating-cooling affordability gap” is estimated to be over $10 billion. Another step would be to encourage consumers to purchase energy-efficient appliances by extending the energy efficient appliance credit (from the energy tax provisions removed from the 2007 Energy Bill right before passage), and provide a tax credit for individual spending (not through an employer) on public transit.

Increase federal support in 2008 for improving the energy efficiency of residential housing.

Residential construction employment—the component of the construction sector most directly affected by the housing slump—fell nearly 7 percent in 2007, down sharply from 2.0 percent growth in 2006. Overall, the construction sector lost 195,000 jobs—a 2.5 percent decline in 2007 for a sector in which jobs grew by 1.8 percent in 2006.

The housing and construction sectors are unlikely to rebound quickly on their own, but federal support for programs to support residential energy efficiency could kick start the sectors, sustain employment, boost economic activity, help consumers combat rising energy prices, and reduce our oil dependence and the carbon emissions that cause global warming. We therefore urge Congress to:

  • Fully fund weatherization assistance to the level authorized by the Energy Independence and Security Act, which is $750 million for Fiscal Year 2008 and $900 million for FY 2009. Inflation-adjusted appropriations for this program have been cut by 11 percent since FY 2006.
  • Extend and increase just for 2008 three tax credits that were included in the 2007 energy tax bill: the residential energy efficiency property tax credit (increase cap to $6,000), solar energy and fuel cell investment tax credit for commercial and residential property owners, and energy efficiency improvements to existing homes tax credit.

Expand funding for job training programs that include new “green collar” jobs

Training workers for energy conservation and clean energy technologies jobs, for which demand is likely to only grow, will provide new job opportunities for young people and a cadre of contractors and construction workers who may find traditional building trades work slowed by the downturn. Training should be accomplished by means of existing delivery systems that can quickly absorb additional capacity. Congress should:

  • Rapidly increase the availability of funds for worker training in green sectors of the economy under the Workforce Investment Act.
  • Promote community-based partnerships for job training and pathways out of poverty by fully funding and significantly expanding the Green Jobs Act recently enacted in the Energy Independence and Security Act (some start-up time, but could spend later in 2008).
  • Dramatically increase national service opportunities in a low-carbon economy (including transitional work programs) by increasing funding for federal programs that support service learning and investments in a skilled emerging labor force (could easily absorb $50 to $100 million to support green worker service opportunities immediately).
  • Fund the gap in Youthbuild funding in FY 2008 ($40 million below its immediate need) with funds to support green job training in the construction industry, among other job opportunities.

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Laura Tyson

Senior Fellow

Sarah Rosen Wartell