The Shape of the Stimulus Package

Slowing growth and stock market dips at home and around the globe have put pressure on U.S. political leaders to come up with an economic stimulus package that would push the American economy away from recession before it may be too late. Treasury Secretary Henry Paulson is in talks with congressional leaders about the exact package that could address economic problems while remaining politically palatable to both parties. U.S. News spoke with Dan Clifton, head of political research at Strategas Research Partners, an investment and macro-economic policy research firm, about how the stimulus package is likely to look and what's at stake. Excerpts:

Daniel Clifton, Director, Head of Policy Research at Strategas Research Partners, LLC.

What are the elements of the package being negotiated right now?
What we see is a tax rebate, a 30 percent accelerated depreciation for businesses to make new investments, and an extension and increase of unemployment benefits. The Democrats are willing to give a business tax cut to the Republicans to get their own priorities done on unemployment. There tends to be agreement on that. The question is how big is it going to be. The Republicans want to see 50 percent depreciation. My guess is that you will see 30 percent depreciation enacted into law.

How big will the whole package be?
The package has agreement at $150 billion. Based on what's happening today in the market, that may go higher. I think what the Fed did today [in cutting short-term interest rates by three fourths of a percentage point] showed the urgency that they need to get this done in Washington. It will have no impact on the size of the package, but that speeds up the immediacy of an agreement being reached.

How fast can they get it done?
We think this could be hammered out the third week of February—passed and signed into law by the president. So you have an agreement, a bill is drafted, both houses vote on it, and the president signs it—we think that can happen four weeks from today.

Is that too slow?
It's never fast enough. It's not only a question of when the date of enactment is but how fast the money gets into the hands of consumers and businesses. Even if you pass it in a month, and timing-wise it's fine, if you cannot get the rebate checks into consumers' hands for another 10 weeks—end of April, early May—that's probably too late. You have to figure out a way [to do it by] withholding income taxes.

The question is how much is it going to help, and the sooner, the better. If you start talking about mid-June, you're going to have this slowdown feeding on itself, and it may be too late. It's sort of like quicksand. The perception is that consumers and businesses are pulling back, and then you can go into a recession. Having that relief is not only important economically, it's important psychologically for businesses and consumers to move ahead. That's why the stakes are so high.

What kind of political controversies does the tax-rebate aspect of the package create?
On the top line, everyone agrees what needs to be done. Now you're at the point where you've got to shake the details, and it becomes an ideological battle. Republicans want to do it through the federal income tax. The way they're looking at doing it is basically eliminating the 10 percent bracket. So if the first $8,000 of your income is taxed at 10 percent, the Republican plan saves you $800.

The Democratic plan says doing it through the income tax is wrong for two reasons. First, there are 22 million low-income Americans who don't pay income tax because their income is too low, and we want to get money into their pockets. Second, if you do it through the federal income tax, all taxpayers get a tax cut, and they want to cap it at $85,000 of income. They don't think anyone making over $85,000 should get a tax cut. They want to do it through the payroll tax, to capture all those low-income Americans and be able to cut it off because there are income limits—people making over $90,000 don't pay any more payroll taxes after that $90,000. It's a very fragile situation that needs to be worked very closely by Secretary Paulson, [House] Speaker [Nancy] Pelosi, and [Senate Democratic leader] Harry Reid to not go too far and overreach, because then you may lose the votes to get the package done quickly.

Could this stimulus package create new problems for the economy, such as inflation?
Not so much inflation. One threat could be it gets too big, increases the deficit in 2008, a new administration comes in in 2009 and claims that the deficit is too high and calls for tax increases. You have slower growth and higher inflation, and then you go ahead and raise taxes—that is very bad for economic growth in 2009, and coming out of this slowdown in 2008.