Economic Stimulus: Bush and Congress Agree It's Needed

A rare bipartisan mood is putting wind in the sails of a stimulus package.

By Richard Sammon, Senior Associate Editor, The Kiplinger Letter

Jerome Idaszak, Associate Editor, The Kiplinger Letter

January 18, 2008

A bipartisan accord will produce an economic stimulus package in February, allowing for a $100 billion to $150 billion injection of tax refunds and targeted spending to stave off recession.

The general outlines are already becoming clear. President Bush and lawmakers see an urgent need -- and they know that voters are fed up with gridlock -- so they're putting aside some big ideological and political differences and focusing on areas of agreement.

Democrats won't insist on offsetting tax hikes or spending reductions, for example, and Bush won't insist on making his earlier namesake tax cuts permanent.

Most economists, including Federal Reserve Chairman Ben Bernanke, think a quick, well-targeted stimulus may help prevent or at least alleviate a recession in the U.S. A $130-billion infusion, some estimate, would add 1 percentage point to gross domestic product in the second half of the year. But most economists will reserve judgment until Congress and Bush work out the details. That won't be for another couple of weeks.

What will be in the plan? A tax rebate of about $800 per person, more than twice the size of the rebate checks sent out in 2001. All sides agree this should be the principal element because most of the rebate money will be spent quickly, providing lift to consumer spending.

Democrats will push to limit Treasury checks to low- and middle-income earners -- perhaps families with incomes below $110,000 -- but Bush will want to go much higher to include many more taxpayers. Ultimately, they'll reach a compromise on this point.

Corporate tax cuts. Faster depreciation of business assets and other investment incentives aimed at helping create more jobs, possibly a few hundred thousand, in the next six to eight months as a result of direct business investment and factory orders.

A hike in food stamps and a temporary extension of jobless benefits, perhaps for an additional six weeks. Republicans will balk at first, saying they are not elemental to a stimulus prescription, but Democrats are likely to prevail on including them.

A child tax credit expansion. There is wide support to make the $1000 credit available as a refund to more households.

Aid to the working poor. Democrats will push to send money to those who are too poor to pay income taxes, arguing they need a boost, too. But Republicans are in a strong position to limit the rebate checks only to actual taxpayers.

Aid to states facing big deficits. The price tag of a state-aid package may be too large to include in a stimulus, although Democrats and many economists say it may be needed to avert tighter spending and cutbacks at the state level. Many economists also point to the fact that money going into the state pipeline may move too slowly to have a near-term economic boost from road-building and public works, etc.

The ultimate cost will be in the area of $150 billion. Economists say a smaller amount won't help enough while a larger sum may contribute to inflation.

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