Economists: Second Economic Stimulus Needed

Laura Tyson, the former chairwoman of the Council of Economic Advisers under President Bill Clinton and a key adviser to President Barack Obama, said that more stimulus programs in the form of infrastructure spending, a payroll tax holiday and a research and development tax credit are needed.
The White House is facing a public that's very pessimistic about the economy, with new unemployment numbers rising to 9.6 percent, the first increase in four months. The Democrats are staring at possible defeat in the mid-term elections if the job market does not improve, and President Barack Obama will outline new measures Wednesday aimed at boosting the U.S. economy.

Laura Tyson, the former chairwoman of the Council of Economic Advisers under President Bill Clinton, and Mark Zandi, the chief economist at Moody's Analytics, told CBS' "Face the Nation" that more stimulus programs - in the form of infrastructure spending, a payroll tax holiday and a research and development tax credit - are needed.

"The federal government has provided a couple hundred billions dollars in additional stimulus beyond the Recovery Act stimulus we put in place a year and a half ago," Zandi said. "In my view the recovery needs more help."

"We have two trillion or so dollars of unaddressed infrastructure needs," Tyson said. "You want to start with something really big? Start with developing a high-speed rail system . . . [or] modernizing our air control traffic system, for goodness sake. These are things we want to do anyway."

Tyson, who is a key economic adviser to President Obama, said the issue of the national debt, which the Republicans are ratcheting up as a key economic problem, is not important at all at the moment. The immediate need, she said, is to create jobs.

"Before the great recession, we know that we were vastly under-spending on the nation's infrastructure. You can sort of, therefore, start with the notion that infrastructure spending is terrific in two ways: It creates demand right away when you go out and get the project started and get the workers started; it also creates the ability to grow and be productive in the future," she said.

"We were spending in real dollars about the same amount on infrastructure as we were in 1968," when, she said, the U.S. was one-third smaller economically.

Zandi also noted that if Mr. Obama were to push through such spending, the money would have to come from a strapped nation.

"He's going to have to take some of the corporate tax benefits away to pay for it. It will be interesting to see how businesses balance that," he said.

Also on the program, Gretchen Morgenson, an assistant business and financial editor at The New York Times, said she thinks infrastructure programs won't work quickly enough.

"Let's go for things that will have a more immediate impact, like, say, a payroll tax holiday," Morgenson said. "I think [people are] working down their debt load. They're still in a very difficult spot."

But she agrees that more jobs-creation programs are needed.

"The stimulus was not big enough, because you would have seen far greater recovery." She said unemployment figures today would be better if last year's stimulus package had been bigger.

The suspension of the payroll tax is one of the measures expected to be announced by President Obama on Wednesday. Some analysts are skeptical that it, along with other programs, would be able to lift growth significantly. But Zandi said it will have an impact.

"I think if we suspend the payroll tax for businesses that go out and hire additional workers, expand the job tax credit that is in place today, I think that could be effective and be helpful in the next six, 12 months, when the recovery really needs it. I think that would be a boost to the economy," he said.

Tyson also expects Mr. Obama to announce permanent tax cuts for research and development spending.

"Business accounts for something like two-thirds of all R&D spending in the United States, so this is important," she said. "I don't think this is something that has as immediate a job impact as, say, movement on the current tax credits for the unemployed or extending payroll tax holiday. But I think it's very important in terms of job creation over the longer term."

Tyson suggested paying for this tax cut by rescinding the Bush tax cuts, due to expire in January, for the top two percent of income earners, while keeping them in place for middle class earners.

"Use the revenue, which is $35 to $40 billion a year, to help fund the R&D tax credit; use the revenue to help fund a partial payroll tax holiday," she said. "That's the right thing to do."

But Zandi said the top two percent of the wealthiest people in the country will not react favorably to their Bush tax cuts ending.

"In a normal economy, I don't think high income taxpayers would respond to this increase in tax rates, because it's a small increase. But these aren't normal times.

"I think high income households are psychologically very, very fragile," Zandi said. "They've seen their nest egg significantly diminished because of the high stock values and housing values. I think we're taking a gamble with the recovery.

"I think by 2012, '13, '14, when the economy is off and running, then let's phase them in and let those tax rates go. We do need to address the long-term fiscal problems. But not in the near term."