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Obama's Stimulus Package: Will It Be Too Big To Work?

Thursday, 8 Jan 2009 | 1:39 PM ET

If there was any doubt President-elect Barack Obama's stimulus plan will be huge, it was soundly erased during his major economic speech Thursday. The lingering question may be whether it can be passed quickly in its entirety or whether it will come down to a piecemeal, incremental approach.

"I know the scale of this plan is unprecedented, but so is the severity of our situation, " Obama acknowledged, while urging "Congress to move as quickly as possible" to pass the legislation in the next few weeks.

Barack Obama
AP
Barack Obama

Though Obama did not say how much his so-called American Recovery and Reinvestment plan would cost, he confirmed to CNBC Wednesday that it would be at least $775 billion, which is more than 5 percent of the nation's rapidly shrinking GDP.

Though economists of virtually all persuasions generally agree that big is better at this point, they also say size and complexity could slow its passage at a time when the economy needs a quick-fix as much as its needs longer-term stimulus.

"The major purpose should be to reinforce the slight increase in market confidence," says economist David Jones of DMJ Advisors. "The more they get caught up in the debate over the components the less effective it will be. To the extent that they try to get the social agenda in there you slow it down."

The broad strokes of Obama's plan contain all that—touching on education, energy and health- care policy to labor market support, infrastructure spending, tax cuts, foreclosure relief and support for the financial sector to "build a 21st century economy," as the President-elect put it.

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Ambitious agendas are the stuff of new presidencies, when political and popular support are high, but the results are mixed. FDR pushed through an enormous amount during his first 100 days, while President Clinton stumbled early on with the health-care reform initiative.

"It's the window of opportunity issue: if you see it, then you go for it," says former regulator and White House economist Lawrence White, now with NYU's Stern School of Business. "But not everyone agrees we're in a crisis and they start playing games with you."

That could include so-called Blue Dog Democrats , as well as more conservative Republicans, who were loathe to even approve the Wall Street bailout package, generally known as TARP.

Congress "may stand in the way," former National Economic Council Director Lawrence Lindsey told CNBC ahead of the speech, particularly if the legislation is forced to go through the arduous and sometimes treacherous committee process.

Indeed, shortly after the speech, some Congressional Democrats were already grumbling about the ineffectiveness of some measures.

President-Elect Obama on the Economy
President-elect Barack Obama addresses his plans for the economy.

"You have to be careful about being too ambitious," says economist Dean Baker, co-director of the Center for Economic and Policy Research

Video: Obama discusses stimulus plan.

At first glance, the Obama plan certainly appears ambitious in that it is more than a simple economic stimulus plan, but its practicality won't be clear until more details are known.

One of the few specifics was a $1,000 tax cut for 95 percent of taxpayers, what Obama called "the first stage of a middle-class tax cut" that will be included in the federal government's next budget.

Obama said the measure will "get people spending again," part of what he called "immediate relief."

Economists say that is what the economy desperately needs -- relief and demand--and the sooner the better.

"Speed matters here," says money manager Doug Cliggott, CIO of Dover Management.

That point will be underscored in economic data coming out in the days ahead. Forecasters say the unemployment rate likely jumped to 7 percent in December, while retail sales plunged 1 percent. A week after Obama's inauguration, fourth-quarter GDP could show a 4-5 percent decrease.

"The downward momentum is substantial." says Robert Brusca, chief economist at Fact & Opinion Economics. "This is an old-fashioned, severe recession now."

If so, economists say pragmatism, not politics, should drive the stimulus timeline. The simpler the packager, the greater the chance for swift approval, shortly after the new president's inauguration.

"You don't have to have everything," says Baker. "It could be a downpayment. Take the easy things first."

If that's the case, then what's in that downpayment?

Based on a survey of economists, it's a combination of individual tax cuts, aid to cash-strapped cities and states, and ready-to-go infrastructure spending.

Up front, headlined and focused on big actions that have quick effect on aggregate demand are the key criteria.

Cuts in the payroll tax, for instance, will aid business and individuals, putting more money into their pockets. Lower individual tax rates will mean more money on a regular basis, not a one-time basis, such as the rebate checks of a year ago, much of which was thought to be saved not spent. More disposable income would help the retail sector, which is on the brink.

"Tax cuts by themselves just don't have enough bang for the buck," former Fed official Frederic Mishkin told CNBC.

Though some favor additional tax cuts for business, others are skeptical, saying they'll function much like the rebate or the TARP funds.

'If you give this money to business at a time the economy is plunging, it is not going to go out and invest, " says Brusca. It's not going to do anything different. It just transfers wealth."

Swift passage--even it's a smaller package to followed by a second one--would also provide a much needed boost to confidence.

"The symbolism," says Baker. "Wouldn't that be the best thing? It would would say, 'I'm in charge.'"

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