Is It Time for Congress to Enact a Stimulus Package?


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Both the White House and Democratic leaders in Congress are discussing the possibility of some sort of economic stimulus package in the wake of a report from the Labor Department showing that unemployment rose in December from 4.7 to 5.0 percent. While the number of jobs increased overall during the month, the private sector shed 13,000 jobs.

The White House has indicated that the President has not decided yet whether or not to offer a stimulus plan, but that any package sent to Congress from him would likely involve tax breaks rather than increased spending. The President is said to be considering tax rebates similar to the $300 and $600 "advance" rebate checks mailed to taxpayers in 2001, as well as extending the existing Bush tax cuts. The latter idea has been panned by economists (including Martin Feldstein, former chief economic adviser to President Reagan) since the Bush tax cuts do not expire until the end of 2010 and therefore extending them through 2011 and longer could not possibly do anything to counteract a recession taking place today. What's more, the massive increase in the budget deficit that would probably result could actually hurt the economy overall.

Democratic leaders and several economists point out that spending could be very effective in stimulating the economy and certain types of tax breaks could be as well, if they were carefully structured. A recent
forum on this topic sponsored by the Brookings Institution included Feldstein, former Treasury Secretary Robert Rubin and other economists. They all agreed that any stimulus should be "temporary, timely and targeted."

A recent
paper from the Center on Budget and Policy Priorities explains why these principles are important. Tax breaks or spending to stimulate demand in order to utilize excess productive capacity in the economy are not needed forever but only through the period in which we face a recession. If the extra spending or tax cuts are permanent, they could actually do more harm to the economy, particularly if they result in ongoing increases in the federal budget deficit.

The stimulus should also be timely, the experts agreed. Legislation that is passed when a recession is starting to abate, or that does not lead to an immediate increase in consumer spending or other immediate economic activity, is probably useless in fighting the recession.
Any stimulus also must be targeted to those who are likely to spend whatever new money they run into. Low-income people are far more likely to immediately spend any extra money they receive in the form of a tax rebate or extended unemployment insurance, for example, whereas higher-income people may be more inclined to save or invest any extra money they receive, meaning it will be a long time before it has any palpable effect on the economy. Targeting the tax cuts or spending might be particularly difficult for members of Congress who want as many of their constituents (not to mention their friends in business) to get benefits as possible.

The Center on Budget paper explains that certain measures have a much higher stimulative impact on the economy because they benefit those who will immediately spend any money they receive. For example, extended unemployment benefits provide $1.73 worth of increased demand for every dollar spent. On the other hand, a tax break for capital gains and dividends provides only 9 cents of increased demand for every dollar of revenue reduced.

Immediate, one-time tax rebates are on the list of measures favored by the experts at the Brookings forum, but they may have to be targeted to low-income families to be truly effective. A
survey done in 2001 found that less than a quarter of taxpayers planned on actually spending their rebate checks. The rest would save it, which provides no immediate boost for the economy overall.

One problem is that we often don't know if we're in a recession (technically defined as two consecutive quarters of negative GDP growth) until after it's well underway. We don't know if we're seeing one begin now. Feldstein has recommended that Congress pass a package now that will not actually go into effect until some economic indicators "trigger" it, such as a rise in unemployment over three months.

The ideal scenario would probably involve a stimulus package that includes revenue-raising measures to offset the costs but that do not go into effect until several years later, when a recession would be likely to have ended. But at the Brookings forum and elsewhere, some experts have argued that PAYGO should essentially be waived. This probably reflects a concern that the President and his allies in Congress have taken such an extreme position against raising revenue in any shape or form, while cutting spending in the future may end up hurting those who the stimulus is geared to help.

It's reassuring that House Ways and Means Chairman Charles Rangel (D-NY) has indicated that he agrees that the "temporary, timely and targeted" principles should guide any stimulus proposal. Nonetheless, it's worth wondering whether Congress has the self-control to abide by all these nuanced principles in crafting legislation.


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