As its name suggests, a stimulus package should stimulate the economy. The best way to do this, years of economic research has shown, is to put money into the hands of consumers, especially those who will quickly spend it. Funding infrastructure projects will also create jobs and leave communi-ties with lasting improvements, such as better roads and schools.
As Congress continues debate on a stimulus package, disagreement about the proportion of spending versus tax cuts in the bill has intensified. Republican leaders have said the package should consist of 40 percent tax cuts, rather than the 20 percent in the bill passed by the House this week. With more tax cuts, less would be spent on infrastructure, unemployment benefits and health care. That would be counterproductive.
To work, a stimulus bill must quickly get money to consumers, thereby increasing demand for goods, boosting companies’ bottom lines and averting more layoffs. Increasing unemployment insurance, raising food stamp benefits and increasing federal support for health care does this. So, too, does federal funding for construction projects because people are put to work and their paychecks make their way through the local economy.
The benefits of tax breaks are less clear. The $819 billion bill passed by the House includes $500 tax breaks for individuals, including those who don’t earn enough to owe federal income taxes, which has angered some Republicans. There are also tax breaks for renewable energy and business in-vestment.
By most accounts the stimulus package passed by Congress early last year, the centerpiece of which was tax rebates of up to $600 per person, helped a little by increasing consumer spending.
Much more help is needed this time.
Getting additional money into the pocketbooks of people who are most likely to spend it — the lower and middle classes — is the most immediate and low-cost way to do this. Getting the money out quickly is also important. In a recent analysis of the full stimulus bill, the Congressional Budget Of-fice found that about 64 percent of the money would be spent by next September.
In a 2003 analysis of stimulus plans, Mark Zandi, chief economist for economy.com, found that extending unemployment benefits has the largest positive effect by generating $1.73 for every dollar of cost. Second was state fiscal relief at $1.24, followed by a one-time uniform tax rebate, which re-turned $1.19 for every dollar of cost. Tax-rate reductions returned only 59 cents, costing more than they generated, largely because lowering tax rates results in the largest financial benefits to those with the highest incomes who are likely to invest or save that money rather than spend it.
Concern over paying for such assistance is valid, although analysis by the Congressional Research Service shows that stimulus investments pay for themselves — over time.
Less clear is how to help homeowners deal with oppressive mortgages and avoid foreclosures, but the Republican idea of a 4 percent interest rate merits a closer look as the Senate considers the bill next week.
To ensure a new package has the best chance at improving the economy, lawmakers should stick to the guiding principles of economic stimulus: that it is timely and targeted.