Almost two-thirds of the $825 billion economic stimulus package will be spent over the next 19 months, according to revised estimates from the Congressional Budget Office, which buttresses claims by Democrats that the legislation is critical for economic recovery.

CBO director Douglas Elmendorf told members of Congress yesterday that the American Recovery and Reinvestment Act would provide "massive fiscal stimulus" to help the economy reverse a 12-month recession. The stimulus plan could increase gross domestic product by an additional 1.3% to 3.6% in 2009 and create 800,000 to 2.1 million jobs this year, he said.

Elmendorf testified before the House Budget Committee as lawmakers continued to debate the best uses for stimulus spending. Republicans favor tax cuts, saying that federal spending takes too long to stimulate the economy. Democrats prefer to spend funds on projects to improve the U.S. infrastructure.

Elmendorf told lawmakers that the CBO estimates GDP will contract 2.2% in 2009 and the unemployment rate will rise to 8.3%. But those estimates do not take into account the potential impact of the stimulus bill, he said.

Mark Zandi, chief economist at Moody's Economy.com, also testified with four other economists. The Federal Reserve may resort to buying long-term Treasury, municipal, and corporate bonds as well as corporate equity, he said. The Fed has lowered the federal funds rate to almost zero and has indicated it may buy assets to pump money into the economy.

"Asset-backed issuance of credit card and vehicle and student loans and issuance of municipal debt also remain severely disrupted," he said.

Zandi said he favors increasing the size of the stimulus to include more tax cuts, which "get into the economy quickly."

Republicans side with Zandi. Rep. Paul Ryan, R-Wis., said during the hearing that the stimulus must "boost tax incentives for private businesses."

Last week, Republicans received some ammunition for more tax cuts. They cited a preliminary version of the CBO report that estimated only 40% of the stimulus would be spent by Oct. 1, 2010.

However, the CBO's revised report, released Monday, found that about 63% of stimulus funds will be spent by the end of fiscal 2010 and that the preliminary numbers were inaccurate.

Elmendorf told lawmakers that both tax cuts and spending are needed for the stimulus to be successful. Government spending traditionally lags behind budget outlays, particularly with highway spending, he said. He cited a CBO poll of the state transportation agencies that comprise two-thirds of the highway spending in the U.S. The states spent on average 10% of the 17% increase in funds that they received last year for highway projects.

"Historically, money appropriated for highways and transit is spent at a slow rate in the first year and has an extremely long 'tail,' in that funds provided in a particular year are frequently spent over a six-to-eight-year period," CBO said in its report.

The stimulus bill calls for $30 billion for highway construction projects. Elmendorf said there are $67 billion of "shovel-ready" infrastructure projects.

Government spending provides more stimulus than tax cuts, he said. Individuals typically save a portion of the tax cut they receive, he said. Tax cuts provide a quick stimulus while every dollar of fiscal spending "goes directly to demand for goods and services," he added.

Elmendorf said federal aid to state and local governments must be spent on projects that would have been cut due to budgetary restraint. Federal aid provides no stimulus if it pays for projects that local governments would have financed on their own, he said.

"Aid to states and localities is likely to provide more stimulus when those governments are under budgetary pressure to cut spending or raise taxes," he said.

Republicans also were concerned about the projected increase to the deficit that would result from the stimulus plan. Elmendorf agreed with an estimate provided by Ryan that the total cost of the stimulus plan could grow to $1.2 trillion over 10 years when interest payments are included. The price of the stimulus could push the deficit to 10% of GDP, Elmendorf said, "an absolutely stunning figure."

Ryan also said each of the three million jobs President Obama hopes to create with the stimulus would cost $275,000. Elmendorf said the CBO will look carefully at job creation and the "flow" of employment started by the stimulus.

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