Stimulus package: still relevant?
Congress pushes for consensus on a plan to revive the US economy. But some say it may do too little, too late.
For almost three months now, congressional lawmakers have been clashing like dueling chefs over the right ingredients to revive a slumping economy.
But even as top leaders push for a compromise recipe this weekend, the new question is whether the issue even belongs on the front burner.
The Dow Jones Industrial Average moved back above 10000 this week. Consumers keep spending. Manufacturers, and even longsuffering makers of personal computers, show some signs of revival.
All this has economists - and even some Capitol Hill lawmakers - suddenly wondering whether the Great Economic Rescue legislation of 2001 is already too late - and might even do more harm than good.
That's not to say that the recession - which officially began last March - is clearly ending. But the urgency behind fiscal stimulus now appears to be about politics as much as economics.
"We probably don't need a stimulus package now, because there is every evidence that the recession is mild," says David Wyss, chief economist at Standard & Poor's in New York. "But it buys you an insurance policy."
Much in the economy remains uncertain. Unemployment has been rising, corporate profits plunging, and the Federal Reserve is still expected to cut interest rates again next week in its ongoing effort to restore growth.
In that context, a stimulus measure might speed an economic rebound - or cushion against further declines in America's gross domestic product.
At the same time, however, it could add to worrisome new deficits in the federal budget. By contrast, Congress's spending restraint in the 1990s buoyed economic growth by keeping long-term interest rates low for consumers and employers.
Moreover, the stimulus measure would come after months of interest-rate cuts that may now be having the desired effect.
"The longer we wait, the less imperative it becomes to do anything at all about this recession. The economy will turn around, even without a stimulus package," says William Gale, a senior fellow at the Brookings Institution, who has been advising lawmakers on this plan.
But the political pressures to reach a deal are still powerful. No member of Congress wants to go back to voters with a record of obstructing a plan that could have helped - especially with uncertainties such as the possibility of new terror attacks or a war-related spike in oil prices.
Beyond the high-stakes political calculations for both sides, here is how major components now under negotiation might affect the economy:
More tax rebates. These would cover those who missed out on the first round of President Bush's $1.35 trillion tax cut. A high priority for both parties, it gets $300 checks quickly into the hands of the people most likely to spend them - the hallmark of an effective stimulus measure, according to most economists. But timing is everything in an economic-recovery plan, and the clock is running down on this item. The aim was to get some $14 billion into the hands of consumers before the holidays. That's now out of range. If the checks arrive months later, when the economy is already recovering, they could wind up fueling inflation.
Extended jobless benefits. Early on, Democrats proposed a $28 billion plan to give displaced workers an additional 13 weeks of unemployment and health benefits. This, again, would put money in the hands of people likely to spend it. But Republicans warned that such a provision could increase unemployment by reducing the incentive to find jobs. The House GOP extended benefits only in states that experienced a 30 percent jump in joblessness.
On Wednesday, House Republicans shifted course and endorsed "not less than" $20 billion to meet the needs of workers displaced since March.
A one-month payroll-tax holiday. A latecomer to the debate, this proposal from Sen. Pete Domenici (R) of New Mexico has been gaining support among both lawmakers and business groups. This would put money in the pockets of all working Americans. Backers say it could be done quickly by suspending both the employee and employer share of the Social Security tax. No need to wait for the Treasury to issue checks.
But some payroll administrators warn that the plan could take months to put in place. Not everyone agrees, but if a December window is missed, the benefits tilt toward wealthier taxpayers, who pay off most of their Social Security liability early in the year. "If you do it in January, it's a giveaway to the rich," says Cynthia Latta, principal US economist at DRI-WEFA in Lexington, Mass. "Some high-paid CEO's would never pay any Social Security tax at all next year."
More-generous depreciation. An incentive aimed at businesses, this would cost between $14 billion in the Senate Democratic version to $39 billion in the House GOP plan.
Here again, timing is key. By giving businesses a three-year window for bonuses under the new rules, Washington may cause corporations to defer new investments until the last minute - the opposite of the intended effect. "If it's a three-year window, it probably won't have much stimulative impact at all," says Richard Berner, chief US economist at Morgan Stanley.
Repeal of the corporate alternative minimum tax. The $25 billion House tax break, would refund payments for the past 16 years. It has sparked strong opposition in the Senate as a big giveaway to corporations. House Republicans blame the Bush administration for not defending the merits of this provision more aggressively.
Republican economists no longer claim that provisions like repealing the alternative minimum tax will help the economy in the short run. "It's almost always a bad idea to adopt a stimulus plan for stimulus sake," says Kevin Hassett, an American Enterprise Institute scholar who advises House Republicans. By cutting and simplifying taxes, he argues, Congress will be doing something that's "permanently a good idea for the economy."
With expenses for the war on terror mounting daily, some lawmakers also wonder if the country can afford $70 billion to $100 billion for a package of policies that may not even be needed.
This week, even moderate Republicans began airing doubts about the timing and scope of a stimulus. Says Sen. Olympia Snowe (R) of Maine: "There can be diminishing returns, if we don't act quickly - and the time to act quickly has now passed."