Will president-elect Obama’s supersized economic stimulus plan work?

It is all in the details, as they say. Current estimates for the stimulus legislation’s price tag range from $675 billion to $850 billion. If it clears Congress sometime after Obama takes office Jan. 20, it would rank as one of the most costly bills ever passed by U.S. lawmakers.

Many scholars believe the U.S. economy needs a jumpstart of historic proportions. Last week the Labor Department issued a report showing job losses of 524,000 in December and a 7.2 percent unemployment rate, the highest in 16 years.

Still, this is largely uncharted territory. No one is exactly sure what happens if the federal government pumps so much money so quickly into a fragile economy.

Sociologist Fred Block says government spending is “absolutely critical” when both households and businesses are cutting back their spending.

“A big government spending effort will put a floor under the economy, restore confidence, and put people back to work,” said Block, an expert on economic and political sociology and the senior author of a recent white paper, Building on Success: Reforming the U.S. Innovation System.

Spending on technology and innovation during an economic downturn is a good strategy, he said.

“This is part of the way to assure that we get a big future return on the additional dollars that we are borrowing to finance the deficit,” said Block.

He uses the term “stimnovation” to emphasize that the recovery package should not only create jobs, but also point the U.S. towards a better and greener economy that accelerates innovation. It is about time the U.S. did so, he added.

“In recent years, the U.S., with considerable government support, made key innovations in areas such as the Internet, solar photovoltaics, and flat panel display screens, but in every one of these cases, the U.S. lost its global leadership to other countries,” he said.

Infrastructure, taxes

Is spending on infrastructure a good way to boost the economy?

“Yes and no,” said Thomas Mayer, professor emeritus of economics and a monetary economics expert. “A sensible stimulus package would contain some infrastructure spending, but would not rely entirely on it.”

Mayer suggests keeping infrastructure spending to perhaps a third of the stimulus package and devoting the remainder to temporary tax cuts, mostly of an unconventional type, such as compensating states for cutting sales taxes and offering a Social Security-tax holiday.

But infrastructure projects are hard to turn off when the danger to the economy becomes excessive, said Mayer.

“They create interest groups that will vehemently oppose termination and will argue that once you have spent a lot of money on a project it makes no sense to abandon it before it reaches fruition. On the other hand, tax cuts are also hard to reverse, too,” he said.

Mayer believes the best infrastructure projects are those that are “shovel ready” and can be started quickly. “By contrast a program to build new highways is likely to be slow to start.”

In the final analysis, infrastructure spending usually — but not always — has an advantage over tax cuts, Mayer said.

Innovation, education

Nicole Biggart, dean of the Graduate School of Management and a specialist on innovation, would like to see a focus on jobs and tax relief in the package.

“We have to get people back to work and keep people working,” she said.

The more controversial issue, she noted, are tax code changes. The U.S. needs to invest in long-range activities or provide tax incentives that will keep investment flowing in productive ways over time.

Obama’s move to include a substantial tax relief component, Biggart said, indicates his willingness to reach across the aisle to Republicans on the stimulus plan.

On the innovation front, she said technology can be a good way to boost the economy, but it depends on what type of technology is emphasized.

“Some technologies improve productivity, such as software, but don’t necessarily create a lot of jobs,” she said. “Some technologies allow us to do what we are already doing, we just let more people do it if they have the manufacturing tools, for example. Small businesses that can’t afford the latest equipment would be an example.”

She says technologies like bioscience, stem cell therapeutics, biofuels and alternative energy are investments in future economic payoffs.

Serious obstacles to innovation exist in the U.S. economy, Biggart noted.

“If we are to have long-term innovation, we have to repair our K-12 and higher education systems which are as much infrastructure as highways and airports were to the movement of mass-produced goods. We also have to change the regulatory infrastructure that hamstrings our public information technology systems. We are way behind Europe and Asia in data transmission and mobile phone technologies.”

‘Not the key factor’

Steven M. Sheffrin, professor of economics and a former financial economist with the U.S. Treasury, said a strong stimulus package would contain targeted tax cuts that provide incentives for economic activity, expanded unemployment insurance, and temporary aid to states for Medicaid and other programs.

As for infrastructure, he suggests “a very limited plan whose effects would be felt within 18 months.”

However, Sheffrin, who directs the UC Davis Center for State and Local Taxation, does not think innovation will play a major role in the short-term.

“Firms may innovate as they face uncertain and difficult environments, but this is not the key factor to recovery,” he said.

Though Sheffrin acknowledges that governments have historically used monetary policy to spur economies, this approach may not be enough this time around.

Next step for stimulus

Block, the sociologist, emphasizes taking the long view. The stimulus package, he asserts, offers an opportunity to address complex issues like climate change and energy independence.

While the U.S. can put hundreds of thousands of people to work, he said, making school buildings energy efficient with new windows, insulation, new furnaces and solar panels, the key is what happens next after this initial stage.

Block: “Within the first year, the spending emphasis should gradually shift to high tech and energy-saving infrastructure projects such as creating broad access to high speed Internet, building a smart electricity grid, expanded use of alternative energy, building of electric cars, and strengthening our basic system for moving innovations into the marketplace.”