Economic Stimulus Package Should Aid Struggling Families, States

January 15, 2009

Federal policymakers crafting an economic stimulus package should take a page from recent analyses by the Center on Budget and Policy Priorities by focusing the package on aid to hard-hit families and budget-strapped states.

In a Jan. 9 analysis, the Center on Budget and Policy Priorities concluded that some proposals deemed "job creators," such as general business tax cuts, will actually create less jobs than programs directed at low-income families or unemployed workers, such as a temporary increase in food stamps and extension of unemployment benefits. Why? Because these families and workers will quickly spend additional benefits, helping to bolster plummeting consumer demand for goods and services.

Corporate tax cuts are not nearly as effective at stimulating the economy, the Center wrote, because businesses would likely retain their tax cuts until economic conditions improve. State fiscal relief is also an effective stimulus for a troubled economy, the Center wrote, because without it states will likely cut their budgets, sending their local economies further downward and undermining other stimulus efforts. The Center says this view is consistent with a recent analysis of the job creation effects of the proposed Obama economic recovery plan by Christina Romer, who will be chair of the President's Council of Economic Advisers, and Jared Bernstein, who will be Chief Economist in the Office of the Vice President.

The Congress plans to debate the economic stimulus package over the next two weeks. On Thursday, U.S. House Appropriations Committee Chairman David Obey of Wisconsin released an outline for an $825 billion economic stimulus package that would include $550 billion in targeted spending and $225 billion in tax cuts.

The proposed spending is across several sectors, including energy, science and technology, infrastructure, education, health care aid to workers and aid to state and local governments. The proposal would dedicate $43 billion to increasing unemployment benefits and job training, $39 billion to help unemployed Americans pay for COBRA health care benefits and to provide short-term Medicaid coverage options, and $20 billion to increase the food stamp benefit by more than 13 percent.

The two single largest funding areas are $79 billion in state fiscal relief, at least half of which would go toward education funding, and $87 billion for a temporary increase in federal Medicaid matching funds.

There was not enough information to conclude how the Medicaid matching funds would be driven out to the states, but a Families USA report from December 2008 estimated that Pennsylvania could see an additional $1.8 billion in federal Medicaid assistance and 30,000 new jobs from a boost in the federal Medicaid matching rate less than half as big as that now proposed ($37.8 billion rather than $87 billion). Scaling up the Families USA estimates based on the current proposal, Pennsylvania could see 70,000 jobs and increased state business activity of $7.85 billion.

Click here to read Families USA's December 2008 report, which examines how some states were already beginning to cut funding to their Medicaid and Children's Health Insurance Programs (CHIP) at that time.