Image: Bush
Jim Young  /  Reuters
President Bush, flanked by Vice President Dick Cheney, left, and Treasury Secretary Henry Paulson, offers his endorsement of plans to spend federal tax money to stimulate the economy.
By John W. Schoen Senior producer
msnbc.com
updated 1/21/2008 4:00:15 PM ET 2008-01-21T21:00:15
ANALYSIS

With Congress, the White House and Fed Chairman Ben Bernanke now in broad agreement that a tax and spending package is needed to boost the economy, the odds have improved that something will get done. But the proposals, to date, have been short on details. And no matter what any final package looks like, it’s far from clear that it would prevent the economy from slipping into recession.

President Bush and Treasury Secretary Paulson Friday offered a general outline of what they would included in a so-called fiscal stimulus bill, but they gave no details.

“We intentionally don’t want to be overly specific because we’re looking to be collaborative, and there’s a lot of bipartisan agreement,” said Paulson.

White House officials have been floating the idea of a one-time “tax rebate” of $800 for individuals and $1,600 for couples which would make up the bulk of the spending package. A one-time cash infusion is also likely to generate broad consensus among politicians in an election year in which the economy has become the most important single issue among voters.

Democrats are pushing to keep the rebates targeted to those at the bottom end of the income ladder — who they say are most likely to spend the money quickly. But it’s not clear who would be eligible for the rebate. The White House proposal could leave out those who don’t earn enough money to owe income tax but still have to pay Social Security payroll taxes.

Additional proposals that seem to be generating consensus include extending unemployment benefits, boosting food stamp payments and allowing businesses to write off equipment purchases more quickly. Video: Bernanke up to the job?

If the measure is enacted, it will be relatively small in the context of the overall economy. The White House is suggesting a package of no more than $150 billion — or about 1 percent of the $14 trillion gross domestic product. So even if all of that money were spent directly and quickly on goods and services, it’s unlikely it would — by itself — insulate the economy from recession.

The White House and some Republicans in Congress have urged that any stimulus package include an extension of the broad tax cuts engineered by the Bush administration in the president's first term. Those cuts, which lowered taxes on income, inheritance and capital gains on investments, are set to expire in 2010.

"Unless Congress acts, the American people will face massive tax increases in less than three years,” Bush said Friday. “This tax increase would put jobs and economic growth at risk. And Congress has a responsibility to keep that from happening."

But Democrats strongly oppose making the Bush tax cuts permanent, and a protracted debate on the issue could delay or derail passage of a stimulus bill.

House Speaker Nancy Pelosi this week sought to head off debate on the issue.

Major Market Indices

“This is not a stimulus,” she said Thursday. “They're not timely. They're not targeted and they're not temporary. So they don't meet the standard in any way. What we want to do is come together on something ... that will stimulate the economy.”

This would be the second round of tax rebates for the Bush administration. In 2001, when the economy briefly hit a period of mild recession, the White House crafted a tax plan that paid out $300 per person or $600 per household.

But it’s not clear whether another round of rebate checks would revive an economy laid low by a prolonged housing slump and a credit crunch that seems to be stubbornly resistant to Federal Reserve interest rate cuts. A lot depends on just how bad the current downturn turns out to be — something that might not be known for months.

Given the short timetable being discussed by Congress and the White House, it’s also not clear whether a compromise spending plan would be offset with cuts elsewhere in the budget, a task that would be much more difficult. That means the billions spent on tax rebates would add to the budget deficit. But if the short-term spending succeeds, supporters say, it could pay for itself by raising tax revenues that might otherwise be lost if the economy falters.

An extra few hundred dollars could have an immediate impact on family budgets, said Nariman Behravesh, chief economist at Global Insight.

“There are a lot of people struggling to pay their bills — that’s very evident," he said. "This will help them.”

But it remains to be seen how quickly that money flows through to the broader economy. Behravesh estimates that half the money will be spent quickly, so a stimulus package of $150 billion would add no more than a half-percentage point to GDP.

"There are no silver bullets," said Paulson in a briefing with reporters.

Some economists argue that money from emergency government spending packages — even when handed directly to consumers — may not provide even the limited boost Congress and the White House are hoping for.

Some consumers will likely use the money to pay down their credit cards, for example. So while people who get a permanent raise may increase their levels of spending, that’s not usually the case for people who get a one-time payment like a bonus at work, according to Carnegie Mellon economics professor Marvin Goodfriend.

“In general people don’t respond by spending those windfalls — they save most of them,” he said. “It’s highly unlike that this will have big effect on current spending even if it is targeted to those who really are in dire straits.”

Though the bulk of any federal package is expected to be used for rebate checks, which spread the most political goodwill, the biggest bang for the buck would come from extending unemployment benefits, according to a study by Moody's Economy.com, which found that each $1 spent on unemployment benefits yields $1.73 in new spending over the first year.

"Extending unemployment benefits helps bolster confidence," said Mark Zandi, chief economist at Moody's Economy.com and the author of the study. "If people start running out of their unemployment benefits, they cut back drastically on their spending, and it also scares people around them. It is very debilitating on consumer confidence."

The Associated Press contributed to this report.

Video: Shot in the arm

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.71%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.70%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.14%
17.14%
Source: Bankrate.com