RL34349
Economic Stimulus Proposals for 2008: An Analysis
February 01, 2008

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Summary:

In response to fears of an economic downturn, legislators and the President have proposed economic stimulus packages. After negotiations with the Administration, the Recovery Rebates and Economic Stimulus for the American People Act of 2008 (H.R. 5140) was introduced and passed by the House on January 29. On January 30, the Senate Committee on Finance reported the Economic Stimulus Act of 2008, which contains provisions not included in the House bill, as well as elements that are similar. The Senate committee bill is set for consideration on the Senate floor. The estimated budget cost of the House bill is $145.9 billion for FY2008 and $14.8 billion for FY2009, and $117.2 billion over 10 years. The Senate Finance Committee bill's estimated budget cost is $158.1 billion for FY2008 -- about 8% higher than H.R. 5140 -- and $155.7 billion over 10 years. The largest provisions in both bills (in terms of budgetary cost) are a tax rebate for individuals and business tax provisions. Both bills contain these provisions, but differ in their details. In the House bill, the rebate would equal up to $600 for single and $1,200 for married households that are eligible. In the Senate committee bill, it would equal up to $500 for single and $1,000 for married households, but more households would be eligible (including more retirees). The business tax provisions include bonus depreciation and expensing for small businesses. The Senate committee bill also includes an extension in unemployment compensation benefits up to 26 weeks and expiring energy tax provisions, while the House bill includes an increase in the conforming loan limit for mortgages from $417,000 up to $729,750 in high-cost areas. The need for fiscal stimulus depends, by definition, on the state of the economy. While the economy is not officially in a recession at present, there are signs that economic activity may be slowing. Some economists are predicting a recession in the near term based on the downturn in the housing market, its spillover into financial markets, and the rise in energy prices. In the absence of fiscal stimulus, some economists believe that the Fed's recent decision to significantly reduce interest rates and natural market adjustment would be enough to avoid recession. Fiscal policy generally stimulates the economy through an increase in the budget deficit. In the case of deficit-financed spending increases, the increase in total spending is direct. In the case of deficit-financed tax cuts, the economy is stimulated via the increase in spending by the tax cuts' recipients. Any increase in spending as a result of fiscal stimulus is strictly temporary -- in the long run, the economy naturally adjusts to set spending equal to output. Economists have debated which policy proposals would be most stimulative. There is a consensus that proposals that result in more spending, can be implemented quickly, and leave no long-term effect on the budget deficit would increase the benefits and reduce the costs of fiscal stimulus. That being said, there is little consensus on which policy proposals best meet these criteria. Economists generally agree that spending proposals are somewhat more stimulative than tax cuts since part of a tax cut will be saved by the recipient. The most important determinant of stimulative fiscal policy's effect on the economy is its size. Both bills would increase the deficit by about 1% of GDP.