Behind stimulus plan: economic and political gains

Economics and politics are at odds as Congress struggles over a stimulus package to help revive the stalled United States economy.

Economics says, give the extra money in tax breaks and additional spending to those who'll use it now, not save it.

Politics argues that the goodies should benefit your political allies and contributors.

So the White House has been backing a package that favors business and the well-off, part of the Republican political base. But some of those favors don't provide much of a quick bang for each stimulus buck.

For example, the Bush administration calls for accelerating to 2002 the income tax rate reductions passed earlier this year that are currently scheduled to take effect in 2004 and 2006.

During last spring's tax debate, liberals attacked this aspect of the bill as chiefly benefiting the wealthy.

Now the same critics are repeating their message.

"This has nothing to do with stimulus," says Richard Kogan, an economist at the Center on Budget and Policy Priorities (CBPP) in Washington. "The main motivation is to lock in large benefits to the rich."

Citizens for Tax Justice, a liberal Washington research group, figures that 69 percent of this tax break would go to the top 1 percent of taxpayers, making an average of $1.1 million per year. It would save these households an average $16,000 in taxes.

Critics argue such a tax cut would be an inefficient stimulus method.

"Rich people have this nasty habit of saving money," jokes David Wyss, chief economist of Standard & Poor's in New York. "That's how they got rich."

Further, most of the tax benefits would stretch beyond 2002, when the economy will likely be growing briskly again.

The money the well-to-do save is invested. But with industry suffering from overcapacity, it could take time for investment money to produce new jobs.

Democrats should have an advantage in this political game. Their supporters tend to be those with modest or low incomes, those more likely to spend any extra money.

So the Democrats can be both economically sound and politically astute by advocating measures that benefit those who back them at the polling booths.

Yet, 72 percent of Americans approve of President Bush's handling of the economy, up from 54 percent in July, a Gallup poll finds.

Such popular support may have helped convince the House Ways and Means Committee Friday to push though a Republican-backed economic stimulus plan designed to inject $100 billion into the economy over the next year with tax breaks for businesses and payroll tax rebates.

The tax-writing panel voted 23 to 14 along party lines to send the package to the House for a vote as early as this week.

A key feature of the plan is a rebate for an estimated 30 million wage earners who did not qualify for the income tax rebates issued in the last few months as part of the $1.35 trillion 10-year tax cut signed by Bush earlier this year.

The maximum amount of the checks would be $300 for individuals, $500 for heads of households, and $600 for married couples filing jointly - identical to previous checks.

"I am not sure there is an absolute economic need for it," says Stan Collender, a budget expert with Fleishman-Hillard Inc. "There is, however, an absolute political need."

Neither Congress nor the White House wants to be seen as ignoring the recession.

The Bush administration, of course, suggests some benefits to low- and moderate-income workers in its proposed stimulus package. It, for instance, extends unemployment benefits 13 weeks beyond the standard 26 weeks for those laid off after Sept. 11. This would cost $3 billion.

CBPP director Robert Greenstein calls this plan "surprisingly meager." It would not match amounts provided in the recession of the early 1990s.

Also, it would be temporary, whereas the income-tax cuts and various tax breaks for corporations would be permanent.

Interestingly, a prominent group of business leaders and university presidents, the Committee for Economic Development (CED), last week called for an "emergency package" that does benefit those of modest incomes.

It urges a temporary rollback in payroll taxes, additional tax rebates, expanded income support for unemployed and displaced workers, and emergency expenditures under current safety-net programs.

This is far more generous than the Bush package.

The CED also proposes a temporary accelerated depreciation for business investment, a plan many liberals agree could work.

But business leaders, such as the CBPP, and many Democrats, want stimulus measures to be temporary so as to provide budget surpluses beyond 2002.

Oddly, a Democratic-style, quick-working stimulus package that revives prosperity could help Republican legislators in the 2002 congressional elections.