In economics, one looks at options based on the opportunity cost - what one could have had. Politics often avoids doing this like the plague, presenting policies as if they had no cost, or against unrealistic expectations. How good is the current stimulus bill as it is coming out of the "Office of the President-Elect?"

One measurement is against what would have been done by John McCain, another against a "George W. Bush III," but a third against a realistic, ordinary, stimulus package, and finally against more liberal packages.

An economic package facing a significant downturn has three parts: relief, restructuring, and recovery. Relief is to ameliorate the pain in the immediate context - this is done primarily by "counter-cyclical" policies like Unemployment insurance and other forms of direct aid. Restructuring is designed to move resources from wasteful activities to more productive ones, and recovery is designed to create a long term stream of sustainable demand and supply that will attract private investment. Obama's plan can best be described as "Better Bush": a tax cut and war spending driven plan which at least includes the no brainer steps of infrastructure and counter-cyclicals.

More after the jump

Measured against the hypothetical John McCain, Obama is world's ahead. We have three pieces of hard data on this already. The first is McCain's voting against the Bush Stimulus plan in 2001 - but not supporting any alternative. As a balanced budget above all conservative, McCain would have made the mistake of not doing something. But this is reinforced by two much more recent pieces of evidence. One is his mishandling of "suspending his campaign to negotiate" on the bail out, all he managed to do was make himself look foolish. Contrast this with Obama, who whipped effectively for the bill, and even found a way to punish the house for defying him on it. The imbalance in sheer legislative competence was stark, compelling, and fatal for McCain. The third piece of evidence is the auto-bailout. McCain's economic proxies, on their own dime at this point, were recommending letting the big 3 go bankrupt. This would have had cascade effects through the economic system, and would have amounted to a second Lehman bankruptcy.

So based on these pieces of evidence, Obama's bill is much, much, much better than what we could be dissecting from a President-Elect John McCain.

However, that's grading very heavily on the curve: John McCain clearly was past his powers and far out of his depth in dealing with economic problems.

A somewhat harsher test is looking at the measures presented as "Stimulus" in 2001. There were a series of bills, rather than one omnibus bill, so it takes a bit of adding up.

The first part is the counter-cyclical parts of the packages. 42 billion in 2001, over 120 billion this time. A clear win for Obama's bill over the "worst stimulus package in the history of stimulus packages." America does not have large automatic stabilizers in its economic system, so small is almost always too small. The 2001 recession was much smaller, but the package then included only the barest minimum of unemployment insurance. No aid to states, no food stamp increases. In 1991 the response was far more ad hoc, with the various pieces of stimulus being scattered throughout the budget.

Compared then, with the last two recessions, Obama's counter-cyclical plan is better than either President Bush managed.

But then we get to the meat of the problem. Beyond counter-cyclical stimulus, what other stimulus should there be? In the case of both Barack Obama and George W. Bush is "tax cuts."

For Bush there were three rounds of revenue reductions: 2001, 2002, and 2003. Taken together they represent the largest reduction in revenue as a percentage of GDI in the Post-War Era. They are still in force, and Obama is going to leave them in force. By 2004, the three together were reducing Federal Tax Revenues, that is, macro-stimulus, of 276 billion dollars. Obama has pledged 300 billion in tax reductions over two years. That is to say 150 billion dollars a year less.

However, the raw numbers here aren't what is important, because the nature of reducing revenue. First, revenue reductions are less effective than spending, because many people get the tax break, but do what they would have done anyway. Second, the people who get them often don't have any great incentive to spend it anyway. This is particularly true of the Bush tax bills, where the top 20% in income saw over 2/3 of the benefits.

The design of Obama's cuts is not that much better. 100 billion is slated for corporate tax breaks. This can more or less be called "pork for the fat cats," in terms of how little it will do for the economy. Of the remaining 200 billion, most is using the "deduction reduction" method. This has been tried at various times in the past, and almost invariably, it doesn't do very much. The reason is that the amount of money given is so small, that it never encourages the household to spend it, and, in the current environment of lack of pricing power for consumers, it is likely to simply be reflected in higher prices, or in lower wages. This happened with the portions of the Bush tax package in the early part of the decade: the money went to employers, who gave smaller pay increases, rather than employees. Part of the problem is that employers run payroll, and know to the penny what people are getting.

Here then Obama is doing one thing right, and that is spending more sooner, rather than having round after round of ineffectual stimulus. However, the design of his tax cuts is only marginally better. And he's keeping the poorly designed Bush stimulus from 2001, 2002, 2003, and 2008. The definition of insanity, the old saw goes, is doing the same thing over and over again and expecting a different result.

The other form of stimulus in Bush's era, was two wars: Iraq and Afghanistan. Barack Obama is going to continue Iraq, and escalate in Afghanistan. It was the invasion of Iraq, rather than the previous rounds of attempted stimulus that got Bush's expansion going. In fact, under the standards of dating recessions in place before the 2001 recession, the economy would not have left recession until the invasion of Iraq. In terms of producing GDP, war spending is war spending. Companies like Raytheon and so on get contracts, make bombs, and then do it all over again. Soldiers go to war, and this helps create a labor shortage in the US itself.

However, judged from upside, Bush is ahead here. While Bush's team managed to turn Iraq into a debacle, it wasn't impossible for Iraq to produce significant follow on activity in the US by giving the US an oil producing neo-colony. This wasn't going to happen because the Bush executive valued ideological conformity and political loyalty over competence to such a degree that it doomed the enterprise from the start, but as a raw policy a war in Iraq at least has upside, where as Afghanistan is a whole in Asia into which we are going to pour blood and treasure, with the end result of a destabilized Pakistan.

So if one is scoring at home: Bush wins this round.

The last piece of the puzzle is the Obama infrastructure piece. This is what didn't happen amidst infighting in the 1991 recession, and which wasn't even on the table in 2001. That it is there is a testament to Obama's ability to learn, in that last year, and even in October of this year, it figured no where in his rhetoric or thinking.

This is, from the perspective of stimulus, the best part. First, it gets spent here, second, it would not have been spent otherwise, third, it produces follow on economic activity, though not as much as it would when the US was an infrastructure poorer society. In fact, it is very likely that half of the actual increase in GDP, will come strictly from this component of the plan. However, to see how week Obama's plan is, consider the testimony from the Congressional Budget Office from May of 2008: where more infrastructure spending was economically justifiable. Based on Orszag's numbers, 20 billion dollars more in spending was needed just to maintain current infrastructure. In effect, there was a 20 billion dollar draw down of capital. According to CBO, as much as 80 billion dollars could have been spent in addition to current levels based on cost-benefit analysis. This means that there is only about 40 billion dollars per year of incremental Obama spending above what we should be spending anyway.

So taken in sum: Obama's counter-cyclical piece is better than Bush, but of the same design: his tax cuts, while a bad idea are at least better designed and done all at once rather than piecemeal, his war is worse, and his infrastructure is much better. In otherwords, it's relief is larger, faster, and somewhat better, it's restructuring is worse on the war front, better on the home front, and while Bush's recovery program consisted of the housing bubble and deficits without end, Obama's at least, is silent on the matter. It's an improvement, but it isn't much of an improvement when one looks at the Bush results. Bush took America from it's best position in a generation to make decisions about the future, to a back to the wall disaster. Obama doesn't have the luxury of being merely "Not. Worst. Ever."

Bush is leaving office with approval numbers in the mid 20's precisely because his policies were terrible. Bush is the worst two term President in American history, and measured from how small his problems actually were, arguably the worst President in American history. Measuring Obama then, against John McCain, who blundered away his chances at election with legislative incompetence, and George W. Bush, who generated what Hale Stewart reminds us is the worst recovery in the post-war era, while racking up 40% of the total national debt ever, is, to say the least, grading heavily on the curve.

It is hard to score the package exactly, because the details are not yet out, but in general one has to go fairly far up the curve of diminishing returns of fiscal spending before a dollar of micro-reductions in withholding in a time of lack of pricing power looks compelling dollar for dollar. Good spending generates 1.5 dollars of GDP for each dollar of spending, and falls relatively slowly, while revenue reductions for corporations hover in the 25 cents on the dollar. The competitive revenue reduction, as the IMF and others have pointed out is a conservative idea: the Earned Income Tax Credit, which rebates taxes to people at the bottom of the economic scale.

Instead, the more realistic questions are to ask if Obama's package is large enough on its face, and to compare Obama's stimulus package with passable stimulus packages, and to compare the politics of how he has gone about it, with "the art of the possible." Given Republican caucus discipline, and the problem of the missing Senator from Illinois, Obama would have to make some concessions to crazy. Republicans love borrow and squander politics, and Americans insist on electing enough of them that they can hold the rest of the country hostage to their love of digging America ever deeper into debt and denial.

The question of size has been asked already by people like Krugman. Viewed alone, the answer is no: Obama's package is about 390 billion per year, when the consensus is to blunt the coming wave of unemployment, it needs to be closer to 600-700 billion a year. However, if one throws in the cost of war fighting as stimulus, which it is, and one assumes that the Bush program of revenue reduction is kept in place, and one assumes, as most published estimates have, that Congress adds in 100 billion over two years, one gets 225 billion from these additions per year, and that brings it to around 600 billion a year. On the low end of estimates, and badly designed, but at least somewhere in the range.

One such package has been put forward by the Congressional Progressive Caucus, Katrina Vanden Heuvel made a clarion call for this package earlier. In all respects this is a superior plan. It's tax cuts are better designed and targeted. It has more infrastructure. It shifts war spending to domestic spending. Each of these has a cumulative effect: more GDP, more tax revenues collected for less long term impact on the deficit, and more employment. The CPC plan is vague in many parts, and not entirely organized, but it has one other feature which is in line with calls from think tanks like the Brookings Institute: better management of Federal programs: re-engineering Unemployment Insurance, for example.

This single philosophical change: making control over expenditures, and dragging war stimulus back over to domestic stimulus, dramatically improves the "bang for buck" of a stimulus package.

One of the problems with both Obama's plan, and the CPC plan, is in a single word: "green." It is all well and good to call for green. Obama does to. But often "green" means something different to different people: for example the strip mining the soil project which is field to fuel ethanol is not green, but it is in most "green" programs. Synfuels are not "green," but there they are. "Clean Coal" doesn't even exist, but, it is in Obama's plan, and will be slipped into almost any massive push for "green." The reality is that in order for Green to mean sustainable, and not simply greenhorn, the specifics have to be there. Several energy programs have been proposed, by, for example the "Apollo Alliance" and the web based "SMART" goals. These more explicit and more organized plans show the difference between throwing money around, and having a coherent plan. Both target exports, real reductions in pollutants, and have price tags that work.

In short they get at what Spitzer reminds us of in his slate column: It's the social contract, stupid.

But Apollo and EA2020 weren't designed as stimulus programs, and therefore would have to be rebalanced to get the money to the ground faster: more focus on soot reduction, more focus on the driving green demand, rather than on longer term green supply, is appropriate for the task. Green demand, for example universal broadband, upgrades to building stock, a program to buy heavily polluting automobiles, is present in almost all of the solid energy plans, and could be rotated forward to being the first steps in a fast to the ground stimulus package.

And here is where we start to see what the problem is: Bush, McCain, the obstructionists in the Republican Senate caucus, war spending and the borrow and squander policies of the last decade represent the "ugly" of the stimulus world. That is, mostly, these were policies they wanted pushed through no matter what, and the recessionary pressures were merely excuses. Obama's plan is merely bad: it looks like a Republican plan edited by a Democratic Senate that has stiffened it's spine. But since Obama has made it clear that he wants to make concession to the right, not the left, it means that the final plan will be closer to ugly than anyone should be comfortable with.

The Congressional Progressive Caucus, represents the border lands of "good." However to push it further into the good, it needs less focus on bricks and mortar, less diffuse goals where the ideas are prone to abuse, and a more solid grounding. We need more 21st century infrastructure, and less 20th century. We need, as the Brookings Institute outlines on transportation, a focus on spending where the GDP bang for buck is, and less spreading the butter thinly. This means having something which has not been mentioned clearly, but should be: a point of responsibility for managing stimulus funds. The Fed and Treasury are going to have their hands full with monetary policy. The reality is that Larry Summers is the stimulus Czar at this point, which means that he should be in a position confirmed by Congress, and the appropriate resources allocated to him to make the kind of "line by line" analysis that Obama has promised.

In otherwords, the Congressional Progressive Caucus outline is better in all three phases: it is better at relieving the problems, since more money goes to people who need it and will spend it, it is better at restructuring, since it moves the economy away from war time spending sooner, and it is better at recovery, in that it has a far larger component of spending which has a verifiable GDP improvement over the long term.

It is important to realize how far this debate has come: a year ago the stimulus talk was small, wrong, done in the same piecemeal fashion as the last recession, and the result was catastrophe. Even this fall it was easier to throw money at banks, billionaires, and bond holders, than it was to talk about a substantial stimulus package. Obama's package falls into the same errors as Bush in many places. First, he wanted a middle class tax cut no matter what. He's been talking about it since the economy was good, so it isn't a stimulus measure, so much as a measure of his ideological Reaganism. Second, it relies, sotto voce, on war spending, and not even war spending with an upside. Third, it lacks the kind of controls and accountability as being front and center to the plan that will make it easier to both sell to the public, and manage once there is buy in.

Since Obama's package is, in fact, too small, and does not deliver enough bang for the buck, there is a political opening for a revolt from the left. That is, to push a series of changes that will shift war spending to domestic spending, shift green-washed soot, smog, and strip-mining the soil programs to real green programs, changes that will put more money into internet infrastructure, and changes that will deliver more green demand more quickly. These changes would improve the GDP kick of the bill, since they would be heavily focused on direct fiscal spending that creates domestic demand, they would lengthen the time of lower resource pricces, giving America more time to use stimulus without having to also fight inflation as heavily, and they would be better at creating the "restructuring" part of a stimulus package.