Economic Cures Aimed at Middle Class

Martin Crutsinger
AP Economics Writer

With the economy’s prospects growing bleaker seemingly by the day, politicians in both parties have rallied around the three Ts, the mantra that any stimulus package needs to be timely, targeted and temporary.

One might add the three Bs as well – the ability to deliver the biggest bang for the buck. In that regard, tax rebates have quickly risen to the top of a list that also includes extended unemployment benefits and a boost in food stamp payments.

All three proposals have one very big advantage for politicians worried about what the economy will look like when voters go to the polls in November. They offer the promise of getting assistance out quickly to low and moderate income people who won’t delay in spending the extra cash.

That is considered crucial given the precarious state of the economy at the moment. The great fear is that consumers, who have been the standout performer during the current expansion, could now be faltering under the successive blows of a steep slump in housing, spiraling energy costs, a spreading credit squeeze, rising unemployment and falling stock prices.

Some analysts believe the stimulus package may already be too late to prevent a recession, but even the most pessimistic think it is still needed to mitigate the length and severity of a downturn.

Federal Reserve Chairman Ben Bernanke lent his considerable weight on the side of a stimulus package on Thursday. "Getting money to low and moderate income people is good in the sense of getting a bang for the buck," he told the House Budget Committee. He said packages in the range of $50 billion to $150 billion would be "reasonable" to help the economy.

Bush has gone down the tax rebate road before. Back in 2001, he added refunds of up to $300 per individual and $600 per household as a recession-fighting element of the tax cut plan that had been the centerpiece of his 2000 campaign.

Economists said a reasonable range for tax cuts in the new package might be $500 to $1,000.

Democrats would like to tilt the relief to the poor and lower income taxpayers by adding an increase in unemployment benefits, doubling the normal 26 weeks that a jobless worker can collect benefits, and by also boosting food stamp payments.

Those proposals make economic sense because the more relief that is provided to lower income households, the more money that will get spent quickly, meaning a faster and bigger boost for consumer spending, which accounts for two-thirds of economic activity.

A study showed that Bush’s 2001 stimulus package was a success in this regard, with two-thirds of the tax refund payments getting spent in the first six months. The recession that year was mild. It began in March but was over by November even though the country got hit during that period by the Sept. 11 terrorist attacks.

A separate study of various stimulus proposals shows that some proposals provide a much greater boost than others. Leading this category was extending unemployment benefits, which provides $1.73 in spending increases for each $1 spent during the first year of the program.

"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."

Providing states with federal support so they don’t have to cut their own programs provides $1.24 in increased spending for each $1 it costs, while a targeted tax cut provides $1.19 boost, according to Zandi’s study.

The reason these items had a bigger payout than they cost reflects the fact that the assistance goes to poorer people who spend the extra benefits quickly. This helps trigger what economists call the "multiplier effect" in that a dollar of increased spending gets recycled through the economy, boosting the spending of other people.

By contrast, other proposals which benefit wealthier individuals such as across-the-board tax cuts and reductions in dividends and capital gains taxes were found to return less than their cost during the first year.

Bush started this year saying he did not know whether a stimulus plan was needed and if it was, he wanted to make sure that Congress made his first-term tax cuts permanent.

But the deteriorating economic situation has now convinced him of the need to offer a stimulus package. Democrats are letting it be known that if Bush is serious about moving quickly, he will need to delink the proposal from his drive to make his tax cuts permanent.

The betting is that he will do so and that Democrats and Republicans, with their eye on the November elections, will strike a deal.

"For this to keep us out of a recession, it has to be passed by Congress quickly and I think they can do it," said David Wyss, chief economist at Standard & Poor’s in New York. "If you are a lawmaker, are you going to vote against giving your constituents a check for several hundred bucks?"

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EDITOR’S NOTE – Martin Crutsinger has covered economics in Washington for The Associated Press since 1984.