How the stimulus is changing America

The American Recovery and Reinvestment Act of 2009 – President Obama’s $787 billion stimulus – has been marketed as a jobs bill, and that’s how it’s been judged.

The White House says it has saved or created about 3 million jobs, helping avoid a depression and end a recession.

Republicans mock it as a Big Government boondoggle that has failed to prevent rampant unemployment despite a massive expansion of the deficit. Liberals complain that it wasn’t massive enough.

It’s an interesting debate. Politically, it’s awkward to argue that things would have been even worse without the stimulus, even though that’s what most nonpartisan economists believe. But the battle over the Recovery Act’s short-term rescue has obscured its more enduring mission: a long-term push to change the country.

It was about jobs, sure, but also about fighting oil addiction and global warming, transforming health care and education, and building a competitive 21st century economy. Some Republicans have called it an under-the-radar scramble to advance Obama’s agenda – and they’ve got a point.

Yes, the stimulus has cut taxes for 95% of working Americans, bailed out every state, hustled record amounts of unemployment benefits and other aid to struggling families and funded more than 100,000 projects to upgrade roads, subways, schools, airports, military bases and much more.

But in the words of Vice President Joe Biden, Obama’s effusive Recovery Act point man, “Now the fun stuff starts!” The “fun stuff,” about one-sixth of the total cost, is an all-out effort to exploit the crisis to make green energy, green building and green transportation real; launch green manufacturing industries; computerize a pen-and-paper health system; promote data-driven school reforms; and ramp up the research of the future.

“This is a chance to do something big, man!” Biden said during a 90-minute interview with TIME.

For starters, the Recovery Act is the most ambitious energy legislation in history, converting the Energy Department into the world’s largest venture-capital fund. It’s pouring $90 billion into clean energy, including unprecedented investments in a smart grid; energy efficiency; electric cars; renewable power from the sun, wind and earth; cleaner coal; advanced biofuels; and factories to manufacture green stuff in the U.S.

The act will also triple the number of smart electric meters in our homes, quadruple the number of hybrids in the federal auto fleet and finance far-out energy research through a new government incubator modeled after the Pentagon agency that fathered the Internet.

The only stimulus energy program that’s gotten much attention so far – chiefly because it got off to a slow start – is a $5 billion effort to weatherize homes. But the Recovery Act’s line items represent the first steps to a low-carbon economy. “It will leverage a very different energy future,” says Kristin Mayes, the Republican chair of Arizona’s utility commission. “It really moves us toward a tipping point.”

The stimulus is also stocked with nonenergy game changers, like a tenfold increase in funding to expand access to broadband and an effort to sequence more than 2,300 complete human genomes – when only 34 were sequenced with all previous aid. There’s $8 billion for a high-speed passenger rail network, the boldest federal transportation initiative since the interstate highways.

There’s $4.35 billion in Race to the Top grants to promote accountability in public schools, perhaps the most significant federal education initiative ever – it’s already prompted 35 states and the District of Columbia to adopt reforms to qualify for the cash.

There’s $20 billion to move health records into the digital age, which should reduce redundant tests, dangerous drug interactions and errors caused by doctors with chicken-scratch handwriting. Health and Human Services Secretary Kathleen Sebelius calls that initiative the foundation for Obama’s health care reform and “maybe the single biggest component in improving quality and lowering costs.”

Any of those programs would have been a revolution in its own right. “We’ve seen more reform in the last year than we’ve seen in decades, and we haven’t spent a dime yet,” says Education Secretary Arne Duncan. “It’s staggering how the Recovery Act is driving change.”

That was the point. Critics have complained that while the New Deal left behind iconic monuments – courthouses, parks, the Lincoln Tunnel, the Grand Coulee Dam – this New New Deal will leave a mundane legacy of sewage plants, repaved roads, bus repairs and caulked windows.

In fact, it will create new icons too: solar arrays, zero-energy border stations, an eco-friendly Coast Guard headquarters, an “advanced synchrotron light source” in a New York lab. But its main legacy will be change. The stimulus passed just a month after Obama’s inauguration, but it may be his signature effort to reshape America – as well as its government. (See pictures of Barack Obama behind the scenes on Inauguration Day.)

“Let’s Just Go Build It!” After Obama’s election, Depression scholar Christina Romer delivered a freak-out briefing to his transition team, warning that to avoid a 1930s-style collapse, Washington needed to pump at least $800 billion into the frozen economy – and fast. “We were in a tailspin,” recalls Romer, who is about to step down as chair of Obama’s Council of Economic Advisers. “I was completely sympathetic to the idea that we shouldn’t just dig ditches and fill them in.

But saving the economy had to be paramount.” Obama’s economists argued for tax cuts and income transfers to get cash circulating quickly, emergency aid to states to prevent layoffs of cops and teachers and off-the-shelf highway projects to put people to work. They wanted a textbook Keynesian response to an economy in cardiac arrest: adding money to existing programs via existing formulas or handing it to governors, seniors and first-time home buyers. They weren’t keen to reinvent the wheel.

But Obama and Biden also saw a golden opportunity to address priorities; they emphasized shovel-worthy as well as shovel-ready. Biden recalls brainstorming with Obama about an all-in push for a smarter electrical grid that would reduce blackouts, promote renewables and give families more control over their energy diet: “We said, ‘God, wouldn’t it be wonderful? Why don’t we invest $100 billion? Let’s just go build it!’ ”

It wasn’t that easy. Utilities control the grid, and new wires create thorny not-in-my-backyard zoning issues; there wasn’t $100 billion worth of remotely shovel-ready grid projects. It’s hard to transform on a timeline, and some congressional Democrats were less interested in transforming government than growing it. For instance, after securing $100 billion for traditional education programs, House Appropriations Committee chairman Dave Obey tried to stop any of it from going to Race to the Top, which is unpopular with teachers’ unions.

Ultimately, even Obama’s speed focused economists agreed that stimulus spending shouldn’t dry up in 2010. And some Democrats were serious about investing wisely, not just spending more. So House Speaker Nancy Pelosi insisted on $17 billion for research. House Education and Labor Committee chairman George Miller fought to save Race to the Top. And while the grid didn’t get a $100 billion reinvention, it did get $11 billion after decades of neglect, which could shape trillions of dollars in future utility investments.

It takes time to set up new programs, but now money is flowing to deliver high-speed Internet to rural areas, spread successful quit-smoking programs and design the first high-speed rail link from Tampa to Orlando. And deep in the Energy Department’s basement – in a room dubbed the dungeon – a former McKinsey & Co. partner named Matt Rogers has created a government version of Silicon Valley’s Sand Hill Road, blasting billions of dollars into clean-energy projects through a slew of oversubscribed grant programs. “The idea is to transform the entire energy sector,” Rogers says. “What’s exciting is the way it fits all together.”

“They Won’t All Succeed” The green industrial revolution begins with gee-whiz companies like A123 Systems of Watertown, Mass. Founded in 2001 by MIT nanotechnology geeks who landed a $100,000 federal grant, A123 grew into a global player in the lithium-ion battery market, with 1,800 employees and five factories in China. It has won $249 million to build two plants in Michigan, where it will help supply the first generation of mass-market electric cars.

At least four of A123′s suppliers received stimulus money too. The Administration is also financing three of the world’s first electric-car plants, including a $529 million loan to help Fisker Automotive reopen a shuttered General Motors factory in Delaware (Biden’s home state) to build sedans powered by A123 batteries. Another A123 customer, Navistar, got cash to build electric trucks in Indiana. And since electric vehicles need juice, the stimulus will also boost the number of U.S. battery-charging stations by 3,200%.

“Without government, there’s no way we would’ve done this in the U.S.,” A123 chief technology officer Bart Riley told TIME. “But now you’re going to see the industry reach critical mass here.”

The Recovery Act’s clean-energy push is designed not only to reduce our old economy dependence on fossil fuels that broil the planet, blacken the Gulf and strengthen foreign petro-thugs but also to avoid replacing it with a new economy that is just as dependent on foreign countries for technology and manufacturing. Last year, exactly two U.S. factories made advanced batteries for electric vehicles. The stimulus will create 30 new ones, expanding U.S. production capacity from 1% of the global market to 20%, supporting half a million plug-ins and hybrids.

The idea is as old as land-grant colleges: to use tax dollars as an engine of innovation. It rejects free-market purism but also the old industrial-policy approach of dumping cash into a few favored firms. Instead, the Recovery Act floods the zone, targeting a variety of energy problems and providing seed money for firms with a variety of potential solutions. The winners must attract private capital to match public dollars – A123 held an IPO to raise the required cash – and after competing for grants, they still must compete in the marketplace. “They won’t all succeed,” Rogers says. “But some will, and they’ll change the world.”

The investments extend all along the food chain. A brave new world of electric cars powered by coal plants could be dirtier than the oil-soaked status quo, so the stimulus includes an unheard-of $3.4 billion for clean-coal projects aiming to sequester or reuse carbon. There are also lucrative loan guarantees for constructing the first American nuclear plants in three decades. And after the credit crunch froze financing for green energy, stimulus cash has fueled a comeback, putting the U.S. on track to exceed Obama’s goal of doubling renewable power by 2012. The wind industry added a record 10,000 megawatts in 2009. The stimulus is also supporting the nation’s largest photovoltaic solar plant, in Florida, and what will be the world’s two largest solar thermal plants, in Arizona and California, plus thousands of solar installations on homes and buildings.

The stimulus is helping scores of manufacturers of wind turbines and solar products expand as well, but today’s grid can only handle so much wind and solar. A key problem is connecting remote wind farms to population centers, so there are billions of dollars for new transmission lines. Then there is the need to find storage capacity for when it isn’t windy or sunny outside. The current grid is like a phone system without voice mail, a just-in-time network where power is wasted if it doesn’t reach a user the moment it’s generated. That’s why the Recovery Act is funding dozens of smart-grid approaches. For instance, A123 is providing truckloads of batteries for a grid-storage project in California and recycled electric-car batteries for a similar effort in Detroit. “If we can show the utilities this stuff works,” says Riley, “it will take off on its own.”

Today, grid-scale storage, solar energy and many other green technologies are too costly to compete without subsidies. That’s why the stimulus launched the Advanced Research Projects Agency-Energy (ARPA-E), a blue-sky fund inspired by the Pentagon’s Defense Advanced Research Projects Agency (DARPA), the incubator for GPS and the M-16 rifle as well as the Internet. Located in an office building a block from the rest of the Energy Department, ARPA-E will finance energy research too risky for private funders, focusing on speculative technologies that might dramatically cut the cost of, say, carbon capture – or not. “We’re taking chances, because that’s how you put a man on the moon,” says director Arun Majumdar, a materials scientist from the University of California, Berkeley. “Our idea is it’s O.K. to fail. You think America’s pioneers never failed?”

ARPA-E is funding the new pioneers – mad scientists and engineers with ideas for wind turbines based on jet engines, bacteria to convert carbon dioxide into gasoline, and tiny molten-metal batteries to provide cheap high-voltage storage. That last idea is the brainchild of MIT’s Donald Sadoway, who already has a prototype fuel cell the size of a shot glass. The stimulus will help him create a kind of reverse aluminum smelter to make prototypes the size of a hockey puck and a pizza box. The ultimate goal is a commercial scale battery the size of a tractor trailer that could power an entire neighborhood. “We need radical breakthroughs, so we need radical experiments,” Sadoway says. “These projects send chills down the spine of the carbon world. If a few of them work, Venezuela’s Hugo ChÁvez and Iran’s Mahmoud Ahmadinejad are out of power.”

Then again, the easiest way to blow up the energy world would be to stop wasting so much. That’s the final link in the chain, a full-throttle push to make energy efficiency a national norm. The Recovery Act is weatherizing 250,000 homes this year. It gave homeowners rebates for energy-efficient appliances, much as the Cash for Clunkers program subsidized fuel-efficient cars. It’s retrofitting juice-sucking server farms, factories and power plants; financing research into superefficient lighting, windows and machinery; and funneling billions into state and local efficiency efforts.

It will also retrofit 3 in 4 federal buildings. The U.S. government is the nation’s largest energy consumer, so this will save big money while boosting demand for geothermal heat pumps, LED lighting and other energy-saving products. “We’re so huge, we make markets,” says Bob Peck, the General Services Administration’s public-buildings commissioner. GSA’s 93-year-old headquarters, now featuring clunky window air conditioners and wires duct-taped to ceilings, will get energy optimized heating, cooling and lighting systems, glass facades with solar membranes and a green roof; the makeover should cut its energy use 55%. It might even beta-test stimulus-funded windows that harvest sunlight. “We’ll be the proving ground for innovation in the building industry,” Peck says. “It all starts with renovating the government.”

The New Venture Capitalists The stimulus really is starting to change Washington – and not just the buildings. Every contract and lobbying contact is posted at Recovery.gov, with quarterly data detailing where the money went. A Recovery Board was created to scrutinize every dollar, with help from every major agency’s independent watchdog. And Biden has promised state and local officials answers to all stimulus questions within 24 hours. It’s a test-drive for a new approach to government: more transparent, more focused on results than compliance, not just bigger but better.

Biden himself always saw the Recovery Act as a test – not only of the new Administration but of federal spending itself. He knew high-profile screwups could be fatal, stoking antigovernment anger about bureaucrats and two-car funerals. So he spends hours checking in, buttering up and banging heads to keep the stimulus on track, harassing Cabinet secretaries, governors and mayors about unspent broadband funds, weatherization delays and fishy projects. He has blocked some 260 skate parks, picnic tables and highway beautifications that flunked his what-would-your-mom-think test. “Imagine they could have proved we wasted a billion dollars,” Biden says. “Gone, man. Gone!”

So far, despite furor over cash it supposedly funneled to contraception (deleted from the bill) and phantom congressional districts (simply typos), the earmark-free Recovery Act has produced surprisingly few scandals. Prosecutors are investigating a few fraud allegations, and critics have found some goofy expenditures, like $51,500 for water-safety-mascot costumes or a $50,000 arts grant to a kinky-film house. But those are minor warts, given that unprecedented scrutiny. Biden knows it’s early – “I ain’t saying mission accomplished!” – but he calls waste and fraud “the dogs that haven’t barked.”

The Recovery Act’s deeper reform has been its focus on intense competition for grants instead of everybody-wins formulas, forcing public officials to consider not only whether applicants have submitted the required traffic studies and small-business hiring plans but also whether their projects make sense. Already staffed by top technologists from MIT, Duke and Intel, ARPA-E recruited 4,500 outside experts to winnow 3,700 applications down to 37 first-round grants. “We’ve taken the best and brightest from the tech world and created a venture fund – except we’re looking for returns for the country,” Majumdar says. These change agents didn’t uproot their lives to fill out forms in triplicate and shovel money by formula. They want to reinvent the economy, not just stimulate it. Sadoway, the MIT battery scientist, is tired of reporting how many jobs he’s created in his lab: “If this works, I’ll create a million jobs!”

Obama has spent most of his first term trying to clean up messes – in the Gulf of Mexico, Iraq and Afghanistan, on Wall Street and Main Street – but the details in the stimulus plan are his real down payment on change. The question is which changes will last. Will electric cars disappear after the subsidies disappear? Will advanced battery factories migrate back to China? Will bullet trains ever get built? The President wants to extend transformative programs like ARPA-E. But would they be substitutes for the status quo or just additions to tack onto the deficit? And would they survive a Republican Congress?

Polls suggest the actual contents of the Recovery Act are popular. But the idea of the stimulus itself remains toxic – and probably will as long as the recovery remains tepid. “Today, it’s judged by jobs,” Rogers says of the act. “But in 10 years, it’ll be judged by whether it transformed our economy.”