Obama's big bang: Sizing up risk

The case for a new stimulus plan

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Fix old infrastructure first

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NEW YORK (CNNMoney.com) -- It is widely considered to be a foregone conclusion. The government will commit a breathtaking amount of money -- as much as $1 trillion may be required, some say -- on an economic recovery package over at least the next two years.

Economists from across the philosophical spectrum have advised President-elect Obama to act boldly to prosecute a war against the economic and financial crises, the speed and depth of which have shocked most experts.

Lawmakers and Obama are already starting to publicly discuss the broad outlines of elements they want in a stimulus package.

But to win a war, it's a good idea to map out or at least have a sense of the endgame before deploying the troops. That is, lawmakers must think about establishing yardsticks, curbs and deadlines for the money.

Otherwise, there's a risk that the historic recovery package morphs into a boondoggle that mortgages the nation's future by adding hundreds of billions to the deficit while creating a hard-to-tame bureaucracy.

Many countries with growing economies have been shrinking the size of their governments, said Harvard economist and stimulus advocate Kenneth Rogoff on CNN's "Your Money. "And here, we're blowing it up. That's a concern over the longer term."

But in the short-term, Rogoff doesn't see an alternative if lawmakers are to prevent what he characterizes as the worst recession since World War II from becoming even worse. "We could just see something really incredible if they don't act coherently," he said.

The breadth and time limit of stimulus efforts are two areas that pose potential concerns for stimulus supporters and opponents alike.

Douglas Holtz-Eakin, a former director of the Congressional Budget Office who served as Sen. John McCain's top economic adviser during the presidential campaign, hopes stimulus money won't be used as "a down payment on 50 areas. When push comes to shove you haven't solved anything," he said.

The Obama team is still working out the specifics of the package it wants, but ideas under consideration range widely in nature from energy and infrastructure to state aid and tax cuts to foreclosure prevention, health care and education.

"They can do a lot, but they can't do everything," said William Gale, the economic studies director at the Brookings Institution. And that's especially true if they want to get a package in place early next year. "You don't want to delay getting this done," Gale said.

The complexity of the issues at hand suggests there might be more than one package next year, Gale said. The first might focus on things that can be implemented quickly, such as infrastructure spending, aid to states to help pay for Medicaid and increases in food stamps and unemployment benefits.

Holtz-Eakin believes stimulus is needed, but he is dubious that there are as many stimulative "shovel-ready" infrastructure projects as many governors and others have claimed.

In his view, spending would be best focused on foreclosure prevention and helping households with strained budgets. Holtz-Eakin proposes three measures: buy and write down mortgages held by troubled borrowers; overhaul the unemployment benefit system so that benefits better support jobless workers; and provide a one-year payroll tax holiday for everyone -- the payroll tax is the money workers pay into Social Security.

Dan Mitchell, a senior fellow at the libertarian Cato Institute, doesn't think any stimulus package can succeed in "priming the pump" of the economy. He concedes, however, that Congress is likely to enact one.

"I want short-term things with an end date," Mitchell said. "The one thing to avoid is any permanent obligation of government spending." As examples he cited costly ongoing programs like President Bush's Medicare Part D Prescription Drug Plan or permanent refundable tax credits.

Even fiscal watchdogs acknowledge that now is not the time to worry about the effects of stimulus spending on the already record deficit.

The Bush administration said last week the deficit had hit $402 billion in just the first two months of the fiscal year - or nearly what it was for all of fiscal year 2008.

So, massive deficit spending will become a factor, sooner rather than later.

"You really need to have some sort of an exit strategy to move to an agenda of putting the budget in order," Holtz-Eakin said. "How they'll get the growth rate on spending under control is far from obvious."

It may not be obvious but Obama has cited deficit control as a top priority. "We're going to be focusing on the budget, to make sure that even as -- in the short term, we deal with the potentially $1 trillion-plus deficit that we're going to be inheriting and we are trying to jumpstart the economy, that we're also in the medium and long term looking at how we can get on a path of fiscal responsibility and sustainability," he said Thursday.

Another issue: How will success be measured? Obama had originally said he wanted a package that would create or save 2.5 million jobs by 2011. Others have said that's too small a number to keep the unemployment rate from climbing.

Since the unemployment rate is a lagging indicator, using that as a litmus test could mean the government ends up spending more money than it needs to. Holtz-Eakin hopes success will be measured earlier by leading indicators of the recession's bottom - which he said should come no later than the fourth quarter of next year. If they don't, he said, stimulus will not have done its job.

While many influential economists have been saying it's better to do too much than too little to fight the downturn, no one is advocating that the money be used for projects that aren't stimulative.

But some of that may be unavoidable. Once Congress puts the economic recovery package through the legislative sausage maker, "it's unlikely to be pork-free," Gale said.

With any legislation, there is always the weighing of the perfect against the good, and never more so than when time is of the essence.

"If [the Obama administration] has a bill that's a 90 percent win I can't imagine they'll want to derail it," Gale said.