The roughly $150 billion spending package hammered out by the House leaders and President Bush will add some pop to the sluggish US economy by the spring and may be enough to avert or end a recession.
The plan is relatively simple for individuals, a tax rebate targeted at those who are likely to spend the money rather than save it. It will hit the economy at about the right time, say many economists of the bipartisan deal announced Thursday.
The Senate plans to put its own stamp on the plan, while respecting the goal of getting a bill to the president's desk by the President's Day recess next month.
The tentative deal calls for giving $300 to $600 for an individual filer and up to $1,200 per family, plus more for children. No rebates would go to those earning more than $75,000 ($150,000 per household). Small businesses will get a tax incentive to spend as well.
"It is no doubt positive for the economy," says Richard DeKaser, the Washington-based chief economist for National City Corp. in Cleveland. "It's a serious stimulus package, and I have little doubt its effect will be meaningful." The fiscal stimulus comes even as the Federal Reserve is aggressively dropping interest rates. On Tuesday, the nation's central banker lowered rates by 0.75 percent and is expected to drop rates again next Wednesday.
"By itself, the fiscal spending package is probably not enough to keep the economy from going into a downturn," says Mr. DeKaser. "But combined with the Federal Reserve's rate-cutting, it should be enough to keep the economy from dipping into a recession." Other economists are not so sanguine, but they say the fiscal stimulus will help to give the economy a jolt in the second quarter, which starts in April. The package could mitigate the effects of the downturn or jolt the economy out it, says economist Mark Zandi of Economy.com.
Congress and the Fed may yet have some leeway because the economic indicators are not yet tilting toward recession. For example, new claims for unemployment remained steady at 300,000 for the week ending Jan. 19, the Department of Labor reported Thursday. This indicates that so far there are no widespread layoffs, says economist Bob Brusca of Fact and Opinion Economics.
In December, concerns heightened that the economy had already slipped into recession because new jobs grew at a low rate and unemployment jumped to 5 percent. "So far it looks like January is reversing some of the dim economic statistics from December," says DeKaser.
However, on Thursday, homeowners also received news that existing sales of homes dropped 2.2 percent in December and were down 12.8 percent for all of 2007. Median home prices dropped 1.8 percent for the year, the first nominal decline in any year since the Great Depression.
However, as part of the House and Bush deal, the tax-rebate package includes a one-year temporary increase in the loans that can be purchased by Fannie Mae and Freddie Mac. Both of them could buy loans up to $625,000, up from $477,000 currently. This should help spur mortgage lending in such states as California and Florida, where high real estate prices have held back lending.
The deal worked out by bipartisan House leaders and Treasury Secretary Henry Paulson represents significant compromises across the board for a Congress typically in gridlock – with all sides dropping elements seen as derailing the plan.The plan is on a fast track on Capitol Hill, where leaders on both sides of the aisle are promising quick action.
Republicans agreed to recalibrate the program to include more lower-income
families, while Democrats gave up cherished spending programs. Democrats also urged and won relief for families caught up in the subprime mortgage debacle and expanded the plan to include wage-earning households that do not file income taxes.
Republicans claimed credit for including tax relief for employers, including a 50 percent bonus deduction on new equipment, and for holding the line on extraneous spending and tax hikes.
"I can't say I'm totally pleased with the package," said Speaker Nancy Pelosi in a briefing announcing the deal on Thursday.
"Let us praise this for what it does and not disrespect it for what it does not: It is timely targeted and temporary, and it was done in record time since our conversation with the president [on Tuesday]," she added.
Meanwhile, Senate leaders say they will give the House plan prompt but thorough consideration. "When it comes over here, we're going to take another look at it," said Senate majority leader Harry Reid. He says that he expects votes on elements that dropped out of the House version of the stimulus plan, including extended unemployment benefits.
"Every dollar spent on unemployment insurance produces $1.87 in additional spending, whereas tax rebates produce only $1.17," says Sen. Charles Schumer (D) of New York, who chairs the Joint Economic Committee.
Sen. Patty Murray (D) of Washington is urging a summer youth program and infrastructure projects to create jobs.
But even strong objections to the proposed plan are taking a back seat to the sense of urgency on Capitol Hill to be seen as as doing something on a front-burner issue.
"I'm not enthusiastic about rebates for people who don't pay income taxes, but if that's what it takes to get a bipartisan compromise, I'll probably support it," said Sen. Chuck Grassley (R) of Iowa, the ranking Republican on the Senate Finance Committee. "I'm not taking anything off the table."
A similar tax-rebate plan in 2002 took about 10 weeks to finish distributing $38 billion in stimulus payments. If it takes that long again, much of recipients' spending will take place in March, April, and May. The tax cut could add about 0.8 percent to the economy's growth rate in the second quarter and 0.25 percent in the next quarter, estimates economist Drew Matus of Lehman Brothers.
"If it's targeted to the right people, it could be enough to reduce the risk of recession, particularly in the light of Fed action," says Mr. Matus.