Washington's hard case: How to juice economy

Congress on Wednesday kicks off a series of hearings to weigh stimulus options. The right answer isn't so clear.

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By Jeanne Sahadi, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) -- Washington lawmakers are about to begin playing a notoriously tricky game: pinpointing just how to steer the economy away from recession.

On Wednesday, the Joint Economic Committee of Congress is holding the first of several hearings to assess options for easing the financial strain many leading economists forecast is ahead.

Successfully predicting the chances of a recession, let alone staving one off, has left plenty of economists with egg on their face. But momentum has been building in Washington to do something to address a cascade of discouraging economic indicators - continued declines in housing, a rise in energy prices, slower-than-expected job growth and weaker-than- expected retail sales.

But there's no consensus on what's needed, what's politically feasible or whether any of it will be enough to nip a recession in the bud.

Rebate checks - a lump-sum payment to millions of consumers - is one idea reportedly being considered by both Democrats and Republicans. But the similarities in expected approaches by the two parties end there.

Republicans are said to be leaning more toward making President Bush's income tax cuts permanent and giving businesses tax relief, such as letting companies write off more of their investments sooner rather than later.

Bush has not yet committed to proposing a package, although he has said numerous times that he's considering a broad range of options. If he proposes one, he is expected to do so at his State of the Union address on Jan. 28.

The Democrats, meanwhile, are interested in boosting government spending to provide more money for the financially strapped and more aid to states. House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nevada, have asked to meet with the president to discuss viable options for what they say they hope will be a bipartisan package. But if recent history is any guide, it's far more likely that a stimulus package will be subject to as much partisan grandstanding from Democrats and Republicans as any other bill.

Pelosi also met this week with both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

Some Washington observers are saying that only the Federal Reserve has any real chance of steering the economy away from recession and that any moves from lawmakers would be only for the sake of politics in an election year.

Skeptics on both sides of the aisle express concern about how quickly any stimulus package could take effect and how temporary any measures would be.

"We're suspicious of stimulus packages because a lot of the time by the time Congress acts it's too late to have an effect on a recession," said Josh Gordon, senior policy analyst at the Concord Coalition, a bipartisan deficit watchdog group.

What's more, Gordon said, when lawmakers put a temporary tax cut in place there's a lot of political pressure to leave it there or risk being accused of raising taxes. The Concord Coalition doesn't oppose temporary deficit increases brought about by efforts to combat recession, he said. But too often, he added, "all stimulus options do is blow a hole through the deficit."

Jason Furman, a senior fellow in economic studies at the Brookings Institution who worked in the Clinton administration, agrees that stimulus must be temporary in nature. He thinks three forms of stimulus could help give the economy the kick it needs, and he says they're among the leading ideas being considered by Democrats:

A one-time rebate Economists disagree about the effectiveness of rebates. "Estimates of how much consumers spend in response to various stimuli are treacherous," former Federal Reserve Governor Lyle Gramley wrote in an e-mail to CNNMoney.com last week.

He noted, for instance, that estimates of the effect on spending of consumers who cash out home equity or take out home equity loans range wildly - from 0 to 60 cents on the dollar.

But Furman points to a study published last year that found that in 2001, when households received rebates between $300 and $600, consumers spent two-thirds of those rebates within six months of receiving them.

The study estimated that the rebates gave a healthy boost to consumer spending.

Reports have indicated that politicians could be considering rebates as high as $500 per individual or $1,000 per couple. It's not clear, however, whether rebates would be given to everyone or limited to, say, households with incomes below a certain threshold.

A temporary extension of the time to collect unemployment benefits This was another measure taken in 2001, and now Furman says the number of long-term unemployed is twice as large as it was then.

A temporary increase in food stamp payments The advantage of doing this rests on the assumption that families eligible for food stamps already spend some of their own money for food, Furman said.

A temporary increase in food stamps could mean families spend less of their own money on groceries and can redirect their spending to other things or even just better afford rising heating and gas prices. To top of page

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