New gambit to rescue economy

The White House and Congress are drafting a stimulus package that includes some new spending and tax cuts.

After years of ceding management of the economy to Alan Greenspan, Washington lawmakers are now poised to take the most concerted action to boost the economy in nearly two decades.

And experts say it should help.

The White House and Congress are moving toward a blueprint that would seek to stimulate corporate investment and put more money in working Americans' pockets. While the details haven't been worked out yet, they will probably include a combination of targeted spending and tax changes, such as a temporary reduction in the payroll tax.

When coupled with the aggressive action taken by the Federal Reserve - which was expected to include another interest-rate cut yesterday - economists say the moves might help bolster consumer confidence and perhaps keep the nation from wallowing in recession too long. "There might be a combination that will work," says Bob Brusca, a New York-based economist. "It will be delicate, however, and there will be partisanship under the surface."

At a White House meeting yesterday, the president and congressional leaders agreed on the general principles of a stimulus package. The options under consideration show how much the politics of Washington - and the economics of the nation - have changed in the three weeks since the terrorist attacks.

To get money in people's hands quickly, Washington officials are now considering reducing the FICA, or Social Security payments, that come out of a paycheck each month. They're also looking at the possibility of a new rebate check.

Just a few months ago, both moves would have been considered anathema, either because they would have siphoned off too much money from the federal surplus or involved tampering with Social Security.

"The best way to stimulate demand is to give people some money, so they can spend it," said President Bush after the meeting with lawmakers yesterday, symbolizing the new mood in the nation's capital on financial issues.

Another option now being looked at - giving businesses a temporary tax break - was also rejected during the first round of tax cutting. It may remain a difficult sell, though.

For one thing, economists point out that there's already too much productive capacity and too little demand no matter what the tax situation. Yet Congress may end up adopting a more modest approach on businesses taxes: They could decide to make it more attractive for businesses to buy computer equipment and grant them temporary tax relief.

"We need consumers out buying things, we need companies buying things, and we need to deal with the displaced worker problem," said House minority leader Richard Gephardt (D) of Missouri yesterday.

Economists, who usually like to qualify everything, say it's possible that some form of fiscal and monetary policy can get the job done - eventually.

The task won't be easy, however. In testimony last month, Mr. Greenspan urged Congress to act cautiously - something lawmakers have not been especially keen to hear. "This is probably the most vexing project assigned to policymakers since their days at graduate school," says Kim Wallace, a Washington analyst at Lehman Brothers.

Despite the risks, Congress and the White House feel they have to act. With some broad principles agreed on, the first challenge will be deciding on the size of the stimulus package.

There is agreement that it should be large enough to boost growth in the short term, but not so large that it would hurt the economy in the long term, either by creating big deficits or spurring a hike in interest rates.

From there, the package is likely to include a combination of pet Republican and Democratic ideas. For example, White House spokesman Ari Fleischer said on Monday that the president is not opposed to increasing the minimum wage, a goal of Sen. Edward Kennedy (D) of Massachusetts.

"The one thing his economic campaign has to reflect is broad bipartisan concerns, because he has to maintain unity as he goes to war," says Marshall Wittmann of the Hudson Institute here.

The main goal of the bipartisan group that met yesterday will be to give consumers more money to spend - at least for the next several months.

Economists believe one of the easiest ways to do this is to reduce the payroll tax - the amount that employer and employee pay towards FICA. For individuals this rate is currently set at about 6.2 percent. Congress could change this to 4 percent or 5.5 percent. "Administratively, it's easy to implement, and it puts cash into people's pockets and checking accounts immediately," says Mark Zandi, chief economist at the Economy.com, a website.

It would also help the poor more than the rich. After making $80,400 in income a year, an individual stops paying FICA. Helping the needy and working class appeals to economists because they spend the money right away on living expenses. By contrast, the tax rebates, which went out in late July to a broader spectrum, haven't gone back into the economy: Polls show 50 percent of Americans put them into savings.

Congress and the president are also likely to agree on extending jobless benefits from the current 13 weeks to 26 weeks. Although there have been scores of layoffs, the unemployment rate stands at a modest 4.9 percent now - but is certain to rise in September because of all the layoffs in aviation and tourism.

One other idea being considered: speeding up the income tax cuts that were passed earlier. "The problem with this is it doesn't do anything for people in the lowest bracket," says Clint Stretch, a tax expert with Deloitte & Touche, an accounting firm.