3 Things You Need to Know About Washington's Stimulus Plans

Bush and Congress are working up pricey fiscal packages to ward off a recession.


Traders look on at the Chicago Board of Trade as President Bush delivers his economic message.

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With a presidential election less than 300 days away and the economic expansion listing badly, the White House and Congress are cooking up a recipe for fiscal stimulus. President Bush this morning called for about $145 billion worth of tax relief and other incentives to stimulate a sagging economy and fend off a possible recession. He said a growth package must include tax incentives for business investment and "direct and rapid" tax relief for individuals. Here is the skinny:

1) It's pretty much a done deal. At the start of the year, it seemed unlikely that President Bush and Congress would agree on any plan to temporarily cut taxes or increase spending to give the weakening economy a boost. Election years aren't usually a great time for bipartisan agreement.

But the plunging stock market—the Dow industrials are off 1,000 points so far this month in the market's worst start to a year since the Great Depression—has provided plenty of incentive for action. And positive comments yesterday by Federal Reserve Chairman Ben Bernanke about potential stimulus really sealed the deal.

"Bernanke gave his approval to the gathering momentum for a fiscal stimulus package, provided that it's done quickly, targeted to generate greater demand, and temporary so as not to further imperil the longer-run fiscal outlook," says JPMorgan Chase economist Michael Ferolio. Adds Greg Valliere of the Stanford Group: "Leaders in both parties are stunned by the deep antipathy of the public toward Congress, so a deal eventually will emerge, providing rebate checks, housing relief, some modest business tax breaks, and more spending. The macroeconomic benefit will be modest, but it will give both parties an opportunity to persuade the public that 'we in Washington feel your pain.' "

2) It's going to be pricey. The details still need to be worked out, but both Bush and congressional Democrats are probably looking at a packages of roughly $140 to $150 billion in stimulus, or 1.2 percent of gross domestic product. (By contrast, the fiscal stimulus package that was part of the 2001 tax cuts was worth $40 billion—0.4 percent of GDP—or about $45 billion in today's dollars.)

The president seems likely to offer a plan that will include $800 rebates for individuals and $1,600 for households. Businesses would get a tax break that would allow them to deduct 50 percent of the price of new equipment they purchase this year. Small businesses would be able to deduct as much as $200,000 in new equipment purchases, up from the current $112,000 limit.

Look for Democrats to push a plan that would include a tax rebate, as well as public-works spending and additional aid for the poor through food stamps and other programs. Here's the shape of the final bipartisan plan, according to Strategas political analyst Dan Clifton: "We view Bush's plan as a marker and are looking for 30 percent depreciation with smaller rebate checks in the final package. Democratic priorities on unemployment insurance expansion and, potentially, aid to state governments will be included in the package as well."

3) It might prevent a recession—or not. It we suffer the sort of mild economic downturn that we did in 2001, then a stimulus package—if passed soon—might do the trick, along with further Fed interest rate cuts. Economic consulting firm Global Insight calculates that "a total package of about $110 to $130 billion, if approved quickly, would provide a boost to growth in the second and third quarter of 2008, and would lift 2008 real GDP growth by close to 0.5 percent."

But don't expect miracles. The 2001 recession was brief and mild, but the economy stayed sluggish until the middle of 2003. And a severe recession like the one we had in 1982 would easily shrug off Washington's efforts.

There are also signs that the economy may be able to avoid a downturn altogether. Even though the December jobs report showed unemployment surging, initial jobless claims fell to a low 301,000 this week, far off the 400,000 level usually seen during recessions. "On balance, signals of slowing are not really building; it is looking like a slowdown more than a recession," says economist Robert Brusca.