By STEVEN R. WEISMAN and EDMUND L. ANDREWS
WASHINGTON — In trying to assemble a bipartisan package to jolt the slumping economy, the White House and Congress have turned to familiar tools that experts say have worked in the past. But there is also a lively debate among economists about which measures will best accomplish the goal.
The favorite template for addressing recession fears is a set of tax measures and spending initiatives passed in 2001 and 2002, including a personal income tax rebate in the summer of 2001 that amounted to $300 to $600 per household and a tax incentive the following year aimed at encouraging businesses to invest in new plants and equipment.
President Bush highlighted both those basic approaches on Friday in setting out his principles for a deal with Congress to address the current downturn. Democrats are also likely to seek increased spending for programs like unemployment insurance or to funnel more money to states, an approach that Mr. Bush signaled he would oppose.
“The research I’ve seen indicates that the programs in 2001 clearly worked,” Treasury Secretary Henry M. Paulson Jr. said in an interview, referring to the tax measures. “They worked quickly, and people spent the money they got. The thing we should be looking at now is how to make them even more effective.”
The nonpartisan Congressional Budget Office reported this week that each of the three elements of the 2001-2 stimulus — personal tax rebates, incentives for business investment and government spending programs — played a role in lifting the economy.
Mr. Paulson said he and his colleagues first began examining the 2001 experience before Christmas, drawing lessons for a contingency proposal if the economy continued to decelerate. The formulation of the principles put forward by Mr. Bush on Friday began two weeks ago.
Personal tax rebates are intended to put cash in the hands of consumers, in the hope that they will spend it immediately, giving a lift to stores, service providers and manufacturers of consumer goods, rather than saving it or using it to pay down debt.
Incentives for business investment are intended to prompt companies to accelerate plans to buy new equipment, increasing demand for that type of product and helping to forestall employment losses or spur new hiring.
“We looked at a lot of data and got a lot of anecdotal evidence,” Mr. Paulson said. “The discussions I had with Congress made us feel better about these measures. People on the Hill saw a need, and they are willing to put aside their pet projects and major strategic priorities to get it passed.”
All indications are that the likely package to be voted on will be a hodgepodge, but experts say that is not bad. Ben S. Bernanke, the Federal Reserve chairman, testified Thursday before the House Budget Committee that because there was disagreement among specialists on what worked, it might be best to adopt a mixture.
“A program that combined a number of elements might in some sense address the problem from a number of different angles and be more effective than one that was only a single element,” he said.
Stimulus packages of the less recent past are often cited as examples of how not to make policy. Economists say that in the recession of the mid-1970s, spending and tax cut measures were enacted too slowly, having an effect only after the economy had already picked up. In 1992 and 1993, partisan squabbling derailed plans for a stimulus package as the recession came and went.
The measures seven years ago sent a different lesson, according to John B. Taylor, a professor of economics at Stanford and a former Treasury official under Mr. Bush. “People look back at 2001 and are more positive about this kind of approach,” he added.
There continues to be a debate among economists about how best to give a kick to the economy. The Congressional Budget Office, for example, said that temporary one-time-only changes in tax policy may have only a moderate effect relative to permanent changes like lower income tax rates.
Consumption jumped after the tax rebate in 2001, it said, but researchers cannot be sure that was because of the tax rebate or the passage of the long-term tax cuts at the same time.
Joel Slemrod, professor of business economics at the University of Michigan, said his study of the 2001 tax rebates showed only 22 percent of taxpayers he surveyed spent most of their rebates. The data suggests that the effect of such rebates, he said, “wouldn’t be as big as one might hope.”
Many economists say that a drawback to Mr. Bush’s proposals, as outlined so far, is that they might not put cash in the hands of people most likely to spend it: those at the lower end of the income spectrum. Mr. Bush signaled that he would limit rebates to people who pay federal income taxes, and many low- and middle-income people pay little or no federal income tax, because they benefit from various deductions and credits.
Robert Greenstein, executive director of the Center on Budget Policy and Priorities, is one of many liberal economists urging that the tax rebate be in the form of a credit for children, or some form of credit for Social Security taxes workers pay.
Without such improvements, he said, Mr. Bush’s plan “would save fewer jobs and do less to shore up a weak economy than it should.” He asserted that the business tax incentives of 2001 and 2002 also had only a modest effect on the economy.
Matthew Shapiro, another economist at the University of Michigan, reached a similar conclusion about the proposed incentives for business — namely accelerated depreciation or what is called a bonus depreciation on capital spending. These are aimed at encouraging investment by allowing businesses to write off the costs faster.
But Mr. Shapiro estimated that the tax incentives for business investment in the past did not work broadly throughout the business sector. He said the “vast majority of investment did not benefit much” from such a measure.
Mr. Paulson, in the interview, acknowledged that if businesses were losing money, a tax incentive for investment would not work as well. But he said that in the current economy, “businesses are operating at fuller levels so this program would be more effective than in the past.” After the last downturn in 2001, business investment slumped for several years after Congress passed tax incentives , in part because many companies had vast amounts of extra production capacity.
Although Democrats have begun to embrace the idea of tax relief for families and businesses, they also insist that the government should provide aid to states to forestall budget cutbacks, extend unemployment benefits and possibly channel money to individuals through programs like food stamps.
Republicans are reluctant to embark on that kind of spending, in part because they do not want federal funds to pay for state government programs over which Washington has no control. But all sides agree that if speed is of the essence, so is the likelihood of compromise.
Economists say that one lesson from past efforts is that there is no point in doing something too late. This time, however, a consensus is emerging that Congress can pass something as early as March and that money can get into the hands of consumers, businesses and states shortly thereafter.
Copyright 2008 The New York Times Company
http://www.nytimes.com/2008/01/19/business/19stimulus.html?exprod=myyahoo
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