Economic Stimulus: Is Congress Too Late?
By Peter Dizikes ABCNEWS.com
Monday December 17 10:26 PM EST
Congress is still arguing about an economic stimulus package, but is it necessary?
After months of political squabbling over an economic stimulus bill, has Congress already missed its chance to help drag the United States out of recession?
That's what a significant number of economists are pondering, as Congress enters its third month of debate on the stimulus package and approaches its apparent winter recess deadline for passing a bill.
"If indeed we are at the bottom of the recession, then yes, it might almost be a little late," says Steven Cochran, director of regional services at Economy.com in West Chester, Pa. "That would mean the turnaround would be a little slower."
While there seems to be progress on Capitol Hill this week, even a bill signed by President Bush (news - web sites) before Christmas would probably take months to implement — leading observers to conclude the government stimulus would be unlikely to kick-start the economy by early 2002.
"I think it's very doubtful," says Michael Swanson, an economist at Wells Fargo & Co. in Minneapolis. "It's very difficult to imagine a mechanism that the government could conceive of to get money in the hands of people by then."
11 Months Average; But This Recession Could Be Different
Of course, the good news for Americans is that a turnaround could simply occur before any legislative package has a chance to take effect. If historical trends apply to this recession, the economy could revive by February or March of 2002.
That's because the 10 post-World War II recessions in the United States have lasted an average of 11 months, and according to the influential National Bureau of Economic Research, the current recession began last March.
On the other hand, there is the possibility that the Sept. 11 terror attacks and their aftermath have compounded the already existing recession. In this scenario, a variety of factors — including rising unemployment and continued national anxiety — could depress spending and extend the slump beyond familiar historical boundaries.
The two longest recessions, which occurred in the mid-1970s and the early 1980s, each lasted 16 months.
Even a Tax Cut Takes Time
In theory, a stimulus bill is meant to crank up the country's lagging demand for goods and services by putting money in the pockets of consumers, or by helping businesses increase investment — which leads to greater employment and, in turn, more consumer spending.
In recent years the Federal Reserve, which controls the country's monetary policy, has assumed much of the responsibility for operating the valves and gears of the U.S. economy. To combat the slowdown, the Fed has lowered interest rates 11 times in 2001 — including a rate cut on Tuesday — which in theory makes it easier for businesses to make rapid investments by allowing them to borrow money more cheaply.
But with interest rates at their lowest point since 1961 and the economy still stumbling, some tweaking of the nation's fiscal policy seems to be in order as well — even though Congress and the White House are not as fast as the Fed when it comes to giving America an economic booster shot.
For instance, rebates from the massive $1.6 trillion tax cut bill signed into law by President Bush this spring were mailed out over a period of several months in the summer and fall.
Still, the possibility of a recovery in early 2002 doesn't mean economists think Congress should do nothing at all; even a bill lagging behind the turnaround, says Swanson, "will help the economy if it's a truly a stimulus."
Which leads to the question that's been dividing Congress since it took up the matter: What kind of measures will genuinely pump up the economy?
Bolstering Business Coffers or Padding Workers' Wallets?
For much of the last two months, Congressional debate has split down familiar ideological lines, with the Republican-controlled House passing a bill in October that largely consists of tax cuts for businesses, and the Democratic-led Senate holding out for a bill that features extended unemployment benefits and health-care tax breaks for laid-off workers.
The House's $100 billion package contains more than $70 billion in business tax cuts and has drawn fire from Democrats for its proposed retroactive repeal — dating to 1986 — of the corporate alternative minimum tax, which is designed to ensure that large companies aggressively using deductions still pay at least some taxes every year.
Those skeptical of the House measure say a stimulus bill primarily devoted to business tax breaks would line corporate coffers while doing little to stimulate spending by most Americans. Instead, they would prefer to see a stimulus spreading aid among both individuals and businesses.
"When you have more people spending smaller amounts, there is more benefit spread out over economy as a whole," says Swanson. "If businesses [also] get some kind of incentive, then you could have a widespread impact."
Payroll Tax 'Holiday' and Other Compromises Floated
A possible compromise being discussed this week could alter the terms of the debate. The White House, having publicly stood behind the House bill, has signaled its willingness to drop most of the business tax breaks in return for speeding up the 10-year program of individual tax cuts mandated by the large tax-cut bill Bush signed into law this spring.
Bush has also indicated he might agree to extend benefits to workers laid off since March 15, and not just after Sept. 11, while Senate Majority Leader Tom Daschle, D-S.D., said Tuesday he would support giving businesses 30 percent tax write-offs for new equipment purchases. Daschle has also said he firmly supports the idea payroll tax "holiday," which would give both employees and employers a break from payroll taxes for a period of time, probably one month.
"If you're looking for a quick hit, something that could help us bridge this slump, then this payroll tax holiday is something that could really help both workers and businesses," says Cochran, who thinks a turnaround could occur around April of 2002.
Many well-known economists approve of the payroll tax idea, but some say that implementing it early in the calendar year would be a problem for businesses.
"It could well be a number of months until the [payroll tax] holiday could be put into effect," say economists Robert Greenstein and Peter Orszag in a paper written for the Center on Budget and Policy Priorities in Washington. "The longer the delay, the less the value of the measure as a stimulus."
Still, in a country craving normalcy after Sept. 11, Cochran notes that a congressional stimulus bill lagging behind the condition of the economy would at least represent a return to business as usual, of sorts.
"Fiscal policy is often timed a little too late," says Cochran. "Congress is not designed for a rapid turnaround." |
