How to Spend a Trillion Dollars

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But when will there be a better time? We should bail out the public sector, but only with serious strings attached; otherwise, we'll repeat the bailout of the financial sector, which pocketed the federal handouts and kept doing whatever it pleased. Bailouts should be reserved for states and communities facing the most drastic contractions — and even those shouldn't be rewarded for frittering away surpluses on sunny-day tax cuts and race-to-the-bottom subsidies designed to lure out-of-state businesses. States shouldn't be rewarded for keeping their fiscal houses in order by stiffing Medicaid programs either.

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Obama's team has proposed increasing the federal share of Medicaid in exchange for assurances that states won't knock more families off their rolls. And his advisers hope to direct the aid where it's needed most — a tough sell in the Senate, where every state has equal power. But Obama should drive a hard bargain. He could provide more aid to states that promote energy efficiency through building codes and incentives for utilities. He could funnel aid directly to transit agencies and metropolitan governments, which tend to be more progressive than states. He could take Senate minority leader Mitch McConnell's advice and give loans instead of grants, which would both help the Treasury down the road and encourage states to make wise investments. He could require states that receive bailouts to promote wind and solar, expand health coverage or buy fuel-efficient police cars. If they don't want to, they don't have to take handouts. The bottom line should be: federal money, federal priorities. (See pictures of Obama's nation of hope.)

Obama's second strategy will be giving money to people — through tax cuts as well as food stamps, jobless benefits and health care for the unemployed. Direct transfers are the fastest way to ship money out of the Treasury, but they don't provide stimulus if they don't get spent. That's what happened last year to a $168 billion stimulus package that relied on income tax rebates — remember when $168 billion was a big deal? — but foundered when many recipients hoarded the cash or paid down credit-card debt. It turns out that smart personal-finance decisions make for a lousy stimulus.

It also turns out that the best way to boost the economy by giving away money is to give it to people who can't afford to save it. That's why food stamps work so well as a stimulus. And that's why Obama is pushing a permanent $500-per-person credit on payroll taxes for every worker making less than $200,000 a year. But his rationale for broad-based relief goes beyond stimulus: he has repeatedly promised a fairer tax code that would make work pay for everyone, and this might be his last chance to play with an extra $1 trillion.

The main downside of tax cuts and benefit increases will be their tails; pity the politician who tries to taketh away what he's already giveth. That's why the best test of any cash stimulus will be whether it makes sense on its merits. Obama's aides have already dropped a proposal to give businesses a $3,000 credit for every job they create — an invitation to game the system. But payroll-tax relief will reward work and put money in the hands of the people who need it most. And there's no time like the present.

The rest of Obama's stimulus will be New Deal–style government spending on needed goods and services, often with modern twists. That means smart meters and weatherization programs to prevent wasting energy; transmission lines and solar panels to promote alternative energy; green school buildings and sewage-treatment plants; wetlands restoration in the Everglades and coastal Louisiana; repairs for aging dams, bridges and airports — plus broadband networks, research, job training and, as Obama has suggested, anything else that seems like a good idea. This is an ideal time for the government to spend money on infrastructure, because labor and equipment are cheap. And improving our shameful infrastructure will improve our competitiveness.

The ideal focus of infrastructure spending would be green projects that help reduce our addiction to fossil fuels, but there's only so much of that ready to go. Nathaniel Keohane of the Environmental Defense Fund started ticking off his wish list in an interview: $1 billion for homeowners to install energy-efficient windows, $750 million for truckers to use fuel-efficient equipment, $600 million for smart boiler controls. "Still $998 billion to go," he said with a sigh. "Really, I spent time on this, and it's a reach to get to $100 billion." Obama and his team are starting to sound irked by demands for more. Why retrofit only 75% of federal buildings? Uh, it's not exactly cost-effective to retrofit a particle accelerator. What about more high-speed rail? Wonderful, if there were more projects ready to go. Why stop at weatherizing 2 million homes? Sorry, there are only so many guys who know how to use caulk guns.

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