The top priority should be the implementation of a large fiscal stimulus package. The House Democratic plan proposed in mid-January includes both increases in government spending and tax cuts. The plan costs approximately $825 billion, equal to 5.5% of the nation's gross domestic product. This is not as costly as the public works projects of the 1930s, but it is costlier than the 3% of GDP spent to stimulate the economy during the tough downturn in the early 1980s. The cost of the current package would thus be consistent with expectations regarding the severity of this downturn. At 5.5% of GDP, the stimulus would also be about enough to ensure the economy stops contracting by the end of 2009 and that GDP returns to its prerecession peak by the end of 2010—reasonable goals.
The mix of tax cuts and spending increases in the stimulus package is designed to provide both quick relief and a substantial boost to the struggling economy. The tax cuts will not pack a big economic punch, as some of the money will be saved and some used to repay debt, but they can be implemented quickly. Aid to state and local governments will not lift the economy, but it will forestall cuts in programs and payrolls that many governments would be forced to make to meet their states' constitutional obligations to balance their budgets. Infrastructure spending will not help the economy quickly, as it will take time to get even "shovel-ready" projects going, but it will provide a significant economic boost. Because the economy's problems are not expected to abate soon, this spending will be especially helpful this time next year.
