Where is all that money going?

I have been hearing about the profligate spending that is the Reinvestment and Reconstruction proposal more popularly called the "economic stimulus plan". So, I decided to investigate what they are proposing.

Here's the marked up summary of the proposal from the House Appropriations Committee, and of the tax portion from the house Ways and Means Committee. Obviously, this will change by the time of its passing.

The bad news, for people earning over $75K ($150K for married couples filing jointly), there is very little relief. Let's see if Obama lives up to his campaign promise of lowering taxes for everyone with income under $250K. It all depends on how they phase the relief out.

Here are some highlights of what they are proposing (I have highlighted in blue, those provisions that individuals earning more than $75K per capita would benefit from):

Taxation (these dollar amounts represent the cost over 10 years):

• $145 BN on a tax credit of 6.2% of earned income phasing out for people earning over $75K ($150K for married couples filing jointly);
• $4.60 BN on increase in earned income tax credits for very poor families;
• $18 BN on increasing child credit;
• $13 BN for college education assistance;
• $2.56 BN for assistance to first time home buyers;
• $27 BN for small businesses and acquiring companies;
• $50 BN for local and state government assistance;
• $16 BN on renewable energy investments;
• $4.27 BN on upto 30% tax credit capped to $1500 per annum on energy efficient improvements to existing homes, e.g. heaters, air conditioners, etc.

Spending proposals (not clear how these are expected to be phased):

• $54 BN on cleaner and more efficient energy (there is a small amount set aside to subsidize energy star appliances);
• $16 BN on science, technology and Internet access;
• $90 BN on improving roads, bridges and waterways;
• $141.6 BN on improving educational facilities and educational programs for poor and under privileged;
• $24.1 BN on improving healthcare services - particularly their computer systems;
• $102 BN in unemployment and hunger prevention benefits;
• $91 BN in preventing lay-offs in the public sector - state and local governments;

A few things to note:

First, the $800 BN number being thrown around is misleading. The cost of the tax proposals is over 10 years. The summary released by the Appropriation Committee on the spending proposals don't explicitly state how these costs will be phased. MSNBC suggested on Hardball that a substantial portion of it will not get spent till Obama's second term.

If we assume that the tax benefits would more or less be uniform over the 10 years or even skewed a little to later years, assuming economic growth and that 80% of the spending would be over the next one or three years, this would mean that the actual impact over the next two years of the stimulus is probably more like: $450 BN - $550 BN. Worse, over $100 BN is actually just preventing cut backs in government spending. So, it isn't incremental spend. The incremental spend is more like, $350 BN - $450 BN. Worse, this is spread over two to three years, which means that the immediate impact is likely $150 BN to $200 BN, which is just about 1.5% of GDP. Given the expected contraction in GDP is 1.6%, this seems low to spur growth. It'll just about cover the gap.

In terms of who gets the benefit, if you ignore timing differences, here's the allocation:

Tax cuts for individuals: 20%
Education: 19%
State and local governments: 18%
Underprivileged: 13%
Basic infrastructure: 11%
Renewable energy: 9%
Small businesses: 3%
Healthcare: 3%
Science and technology: 2%

Unfortunately, most individuals won't see most of these benefits for a while yet, whereas the spending increases will take near immediate effect.