Economists Examine Stimulus Options

Martin Feldstein i i

Martin Feldstein, a former Reagan administration official, is said to be advising the White House on what to do to boost the economy. Alex Wong/Getty Images hide caption

itoggle caption Alex Wong/Getty Images
Martin Feldstein

Martin Feldstein, a former Reagan administration official, is said to be advising the White House on what to do to boost the economy.

Alex Wong/Getty Images
Robert Rubin i i

Former Treasury Secretary Robert Rubin said a stimulus package should be timely and work quickly. Chip Somodevilla/Getty Images hide caption

itoggle caption Chip Somodevilla/Getty Images
Robert Rubin

Former Treasury Secretary Robert Rubin said a stimulus package should be timely and work quickly.

Chip Somodevilla/Getty Images

As the U.S. economy slows, the Bush administration and Congress are struggling to decide how to respond. Hiring is down, real estate is in a coma and banks have suddenly become a lot more skittish about whom they'll lend money to. Whether the economy will actually slip into a recession is a matter of some debate.

Coming up with a solution is no easy task. Policymakers don't know whether the economy is just stalling for a bit or spiraling downward into a major crisis.

At the Brookings Institution in Washington on Thursday, some of the country's best-known economists gathered to discuss possible solutions. Among those present was Martin Feldstein, a former Reagan administration official who is said to be advising the White House on what to do. Feldstein said that Washington needs to find ways to get ahead of the problem.

"What we're talking about now is a pre-emptive strike: What do you do to stop the economy from turning down — and if it does, to make it milder?" Feldstein said.

The trick, according to former Treasury Secretary Robert Rubin, is to design a stimulus package while sidestepping the ideological and partisan fault lines that crisscross Washington. Rubin said that a stimulus package should be timely and work quickly. Tax policy and education may be vital issues to the economy, Rubin said, but the recession is likely to be over long before they can be resolved.

"Let's not worry about long-term marginal tax cuts, infrastructure, social spending, all of which are important issues. Keep that out of it," Rubin said.

What the government can do quickly is hand out money in the form of tax rebates and credits. Injecting the economy with a quick hit of cash would goose spending. But where should the money go to have the maximum effect? Former Federal Reserve member Alice Rivlin would like to see the federal government pass funds directly to the states, some of which — like California, Arizona and Florida — are already in recession.

Another suggestion has been for the federal government to pump more money into food stamps. Martin Feldstein noted that it could be done quickly and it would go to the very people most likely to spend it quickly. Feldstein was cooler to another proposal: letting people collect unemployment benefits for a longer period. But he said that could actually slow the economy's recovery.

"What it does is increase the incentive to stay unemployed," Feldstein said.

But economist Mark Zandi of Economy.com took issue with that.

"No one is more panicked than a person that loses their job. No one cuts back more on spending. That's pure panic. It's key to helping those folks," Zandi said.

Zandi also disagreed with parts of another proposal that has been promoted by Feldstein lately. The Harvard economist has talked about making any stimulus package triggered. That is, Congress would vote to pass out rebate checks now, but they would only be sent out if the economy slowed sufficiently — if, for instance, job growth declined for three consecutive months. Feldstein says that will give consumers confidence that help will come if it's really needed. But Zandi was skeptical.

"If you tell them they might get [a rebate check], it doesn't shore up confidence," Zandi said.

One thing everyone agreed on Thursday is that the Federal Reserve needs to keep cutting interest rates and do so aggressively. That may not revive the housing market anytime soon — simply because the sector's problems run so deep — but doing so, they said, is the best way to ensure that the rebound gets under way.

Options for Jumpstarting the Economy

President Bush and congressional lawmakers are weighing how to give the economy a nudge in light of recent disappointing jobs numbers and a slumping housing market — not to mention markets roiled by the subprime mortgage crisis.

Policymakers have been tight-lipped about the options on the table, but it's likely that Republicans will favor a mix of business tax cuts and tax breaks for individuals, while Democrats will push for tax breaks and non-tax breaks that are more highly targeted to lower- and middle-income Americans.

Among the proposals the administration may look at:

Unemployment insurance benefits: In the past, policymakers have turned to temporarily extending unemployment benefits — generally limited to 26 weeks — when the economy has weakened because it becomes harder to find a job. According to Mark Zandi, chief economist at Moody's Economy.com, the change has the highest "bang for the buck" when it comes to giving the economy a boost relative to its cost.

Increase in food stamps: Advocates of the proposal, including Brookings Institution economists, say giving food stamp recipients 20 percent more aid for six months could be administered easily and quickly, and would be targeted at families most vulnerable to a recession.

Individual tax cuts: The Bush administration is reportedly looking at giving a $600 rebate to families with incomes less than $100,000, much like it did as part of an economic stimulus package after the Sept. 11, 2001, terrorist attacks. Some say that the lowest-income households should receive a benefit even if they have no income-tax liability. Reports also cite a proposal to temporarily reduce the bottom tax rate to 1 percent from 10 percent.

Business tax breaks: Policymakers may allow companies to deduct half the purchase price of capital equipment — such as property or machinery — from their taxes. The U.S. Chamber of Commerce recently suggested lowering the corporate tax rate. Rep. Eric Cantor (R-VA) recently proposed cutting the corporate income tax rate from 35 percent to 25 percent.

Housing help: Some have suggested increasing federal housing subsidies for this year, so that state housing authorities can buy property to rent to lower- and moderate-income families. Another reported proposal is a refundable tax credit for first-time home buyers.

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