January 22, 2008

The Stimulus Package: What to Expect?

Budget Process Step-by-Step

Jan. 22: CBO Director Orszag testifies at Senate Finance Committee on "Stimulus that Makes Sense," 10am, 215 Dirksen. CBO Paper: Options for Responding to Short-Term Economic Weakness

Jan. 23: CBO releases annual Budget and Economic Outlook: FY 2009-2018

Jan. 23: House Budget Committee: CBO Director Orszag testifies on the Budget and Economic Outlook, 10am, 210 Cannon

Jan. 24: Senate Budget Committee: CBO Director Orszag testifies on the Budget and Economic Outlook, 10am, 608 Dirksen

Jan. 24: Senate Finance Committee has additional witnesses on a stimulus package including Martin Feldstein, Chairman of President Reagan's Council of Economic Advisers

Jan. 28: President's State of the Union Address laying out highlights of forthcoming Budget and proposing details for an economic stimulus package

Jan. 29: House Budget Committee hearing on Using Fiscal Policy to Bolster the Economy, with testimony by Alice Rivlin (former OMB and CBO Director), Lawrence Summers (Clinton Administration Treasury Secretary), and Robert Greenstein (CBPP). 210 Cannon, 10am

Feb. 4: President transmits FY 2009 Budget requests to Congress

Late Feb./Early March: Authorizing committees transmit "views and estimates" on the President's budget proposals to the House and Senate Budget Committees

March 14: Before Congress adjourns for Easter Recess on March 14, final action is likely on an economic stimulus package, and the House and Senate Budget Committees are likely to report their respective versions of the FY 2009 Budget Resolution (with Floor action and conference to follow after the recess).

The Stimulus Package: Options

There is broad support for the concept of enacting an economic stimulus package, in the wake of rising unemployment, rising oil prices, the sharp downturn in the housing market, and weakening consumer demand. There is also broad agreement that the stimulus package should be "temporary, timely, and targeted." President's January 18 Speech Statement by Secretary Paulson Pelosi Response Reid Statement Boehner Statement However, interested parties and key players in Congress and the Administration have widely varying interpretations of what, exactly, that means:

- Tax Rebate: The National Retail Federation is calling for a tax rebate to get spending money into the hands of consumers as quickly as possible. National Retail Federation letter One means of doing this would be lump-sum tax rebates. Policymakers would need to address, among other issues, whether rebates should be "across-the-board" or whether rebates should be targeted to low- and middle- income taxpayers (who are more likely to spend the rebate quickly).

Another issue for consideration is whether rebates should be made available to low-wage workers who don't pay income tax, through a "payroll tax holiday," (although this approach would exclude unemployed workers).

- Temporarily Increasing Unemployment and Food Stamp Benefits: CBO observes that both unemployment and food stamp increases would likely be spent quickly and would therefore provide cost- effective stimulus.

- Accelerated depreciation: National Association of Manufacturers is pushing for accelerated depreciation in 2008 to spur business investment. However, CBO questions the timeliness of this type of stimulus, noting that "most of the stimulus appears to come at the end of the period of the incentive." NAM Press Release

- Tax Extenders: High-tech companies are calling for extension of the R&D tax credit that expired at the end of 2007. One can expect to see beneficiaries of the other "tax extenders" seeking inclusion in the package. See WBR's Tax Tracker for a list of tax expenditures.

- Extending the AMT Patch: Another stimulus option would be to extend the "AMT Patch" beyond the 2007 tax year. However, CBO observes that "affected taxpayers are likely to be in upper-income groups and therefore are not likely to change their spending much in response to a temporary delay of higher taxes. In addition, they may not know they are affected...."

- Cut in Corporate Tax Rates: CBO notes that a cut in corporate tax rates "may take time to affect business investment because capital spending decisions are often made in advance."

- Infrastructure Spending: Rep. James Oberstar (D- MN) has called for $15 billion in infrastructure spending, such as water projects. The Chamber of Commerce is also backing this approach. (However, CBO cautions that "because many infrastructure projects may take years to complete, spending on those projects cannot easily be timed to provide stimulus during recessions.") Chamber of Commerce Press Release

- Assistance to State and Local Governments by increasing the Federal Medicaid match: Some have noted the harsh impact on State and local budgets during an economic downturn and have therefore suggested Federal aid to State and local governments. CBO cautions, however, that because States vary in their response to revenue shortfalls, it is difficult to be confident about the stimulative effect of such assistance.

The Stimulus Package and the Bush Tax Cuts

Another component of the stimulus debate is likely to be the strong desire of many in the Republican ranks to use the stimulus legislation as a vehicle to make the President's 2001 and 2003 tax cuts permanent. The tax cuts are currently scheduled to expire at the end of 2010. CBO cautions, however, that permanently extending the tax cuts "is unlikely to provide much demand stimulus to the economy in 2008."

[Context: The reason the tax cuts are scheduled to expire is that the Senate's "Byrd Rule," in 2001, prevented permanent enactment of the tax cuts because of the long-term deficit increases that would have resulted. Last year, for example, CBO estimated that it would cost nearly $2 trillion in lost revenues over 10 years to extend the tax cuts.]

The Stimulus Package and the Economy

Another issue intrinsic to the stimulus debate is how much fiscal stimulus is needed, in addition to the Federal Reserve's monetary actions, to provide an appropriate boost to the economy. CBO released a paper last week, at the request of the House and Senate Budget Committees, addressing these issues. CBO's major conclusions:

- "There is a strong possibility of at least a few quarters of very slow growth. Although the economy may avoid a recession in 2008, the risk of a recession has risen."

- "The Federal Reserve has powerful (monetary) tools to keep the economy growing, but there is no guarantee that it will be able to keep the economy from entering a recession."

- "The system of automatic stabilizers built into the federal budget will act to stimulate the economy in a period of economic sluggishness, helping to mitigate any economic downturn." (In particular, Unemployment Insurance and Food Stamps.)

- "If additional fiscal stimulus is deemed necessary, it would be desirable to make sure that the actions take effect when stimulus is most likely needed and are designed to increase economic activity as much as possible for a given budgetary cost. Such well-designed stimulus can help bolster an economy suffering from weak aggregate demand and thereby help reduce the risk and severity of a recession."

- "The most effective types of fiscal stimulus (delivered either through tax cuts or increased spending on transfer payments) are those that direct money to people who are most likely to quickly spend the bulk of any additional funds provided to them." (emphasis added)

- "Estimates...suggest that...a dollar's worth of stimulus at a time of economic weakness produces roughly a dollar's worth of additional economic activity." (Editor's note: Therefore, adding one percent to the growth of our $14 trillion economy would cost about $140 billion.)

New Budget Docs

CBO: Options for Responding to Short-Term Economic Weakness

Center on Budget and Policy Priorities Statement on Economic Stimulus

WBR's Editor and Publisher, Charles Konigsberg, has just released "America's Priorities: How the U.S. Government Raises and Spends $3 Trillion Per Year." All new subscribers to WBR will receive a complimentary copy. Click hear for details.