Bush tax guru backs stimulus plan

Martin Feldstein

NEW YORK (CNNMoney.com) -- Harvard economist Martin Feldstein, a former top Reagan adviser and the man credited with President Bush's last set of tax cuts, favors a plan to jump start the economy that is likely to be passed by the House of Representatives.

"The things we have been hearing in the last 48 hours make a good deal of sense," Feldstein told the Senate Finance Committee Thursday.

"What can reduce the risks of a significant downturn is the kind of clean bill, fiscal stimulus package that the administration and members of the House seem to be talking about," he said.

The centerpiece of the House plan calls for tax rebates of up to $600 for individuals and pay as much as $1,200 to two-wage-earner households.

But sticking points remain - mainly over who gets what - and Feldstein differed with some of the specifics in the House plan.

The House version dropped Democratic proposals to boost food stamps and extend unemployment benefits in exchange for rebates of at least $300 to nearly everyone earning a paycheck, including low-income earners who make too little to pay income taxes but pay payroll taxes to fund Social Security, according to CNN.

It could also limit the rebates to people earning less than $75,000 a year.

The Senate will could take up the House plan as early as next week, and will likely tinker with it before sending it to the President's desk for approval.

Feldstein said he supported a flat rebate for all who pay taxes, and assistance to lower-income people should come from temporary increases in the food stamp and supplemental income programs.

But he cautioned against temporarily extending unemployment benefits, saying they would create disincentives to returning to work.

In his support for rebates for all taxpayers, he said rebates to higher income earners may be spent more quickly. Those with higher incomes will use savings or credit to spend the money now, he said, as opposed to having to wait for a check from government, which could take months.

"Too much is made that lower income households will spend more," he said.

But another economist told the committee the tax credit should be focused on lower income people, as they are likely to spend all of the money more quickly and it would keep down the cost of the plan.

"There is no evidence that lower income households would spend less," Jason Furman, a Brookings Institution economist, told the panel.

Unlike Feldstein, Furman urged the Senate to expand unemployment benefits, saying they are needed in tough economic times. Like Feldstein - and as opposed to the House plan - he urged an expansion in the food stamp program.

Both Furman and Feldstein told the panel other ideas - like tax cuts for business, government spending on infrastructure projects, or more interest rate cuts from the Federal Reserve - are good but will take too long, and are therefore not a replacement for a tax rebate.

The rebate would create demand now, stimulating the economy until longer term measures like rate cuts had time to kick in.

Feldstein said he thinks legislators should pass a stimulus package now, but wait to enact it until there is further evidence a recession is a real danger.

'It is generally agreed that the economy is weak and could get weaker, but it should be stressed that a recession is not inevitable," he said.