Speedy Deal on Stimulus Plan May Not Yield Short-Term Help

By Steven Mufson and Neil Irwin
Washington Post Staff Writers
Friday, January 25, 2008

The $150 billion stimulus package Congress and the Bush administration unveiled yesterday meets the tests most economists prescribed for the ailing economy: It is targeted, temporary and (relatively) timely.

But even the fast political action on the package -- it took barely a week to negotiate -- may not be fast enough to help the economy over the next several months. The first of the 117 million checks won't be in the mail until late May; some won't arrive until early August. And the shot in the arm for the economy does not directly address the problems of the sagging housing market, towering consumer debt, teetering mortgages and capital-short banks.

"If someone could build the most appropriate stimulus package, it wouldn't be what we got today, but this comes close enough given the realities of the political situation," said Mark Zandi, chief economist of Moody's Economy.com, a consulting firm. Still, he added, "This doesn't solve the fundamental problem plaguing the economy."

Stock and commodity markets were heartened by the package. Despite a 2.2 percent drop in the sales of existing U.S. homes announced yesterday, the stock market rose. Despite an increase in crude oil and gasoline inventories, crude oil prices rose more than $2 to $89.41 a barrel on expectations that a stronger economy would boost consumption of petroleum products.

The stimulus package will send checks to anyone who earned at least $3,000, and as much as $600 for an individual and $1,200 for a couple, with more for people with children. Individuals with more than $87,000 a year of income, however, and joint filers with more than $175,000 of adjusted gross income get nothing.

Economists praised the compromise for including $35 billion for 28 million of the working poor, who are most likely to spend the money, and excluding the top wage earners, who don't need the extra cash.

"This is pumping a lot of money into the pockets of people who are likely to spend it and spend it quickly," said Robert Reischauer, president of the Urban Institute.

Douglas Elmendorf, senior fellow at the Brookings Institution, estimated that 2008 growth in gross domestic product will be 0.7 percentage points higher than it would have been without the stimulus deal.

But many analysts, state governments and business people were disappointed. Democrats had sought a boost in the food stamp program and an extension of unemployment insurance benefits, which they said would find their way into the economy faster.

A study by Zandi estimates that every dollar put into the food stamp program produces a $1.73 increase in the economy as the money is spent and spent again. By contrast, every dollar put into the business tax breaks that are in the stimulus package will increase the economy by 27 cents, according to the study. The business portion of the stimulus package allows companies to write off 50 percent of the cost of equipment in the year of purchase. This will help firms that sell long-lasting equipment such as machine tools, aircraft, and agricultural and construction equipment. Technology firms could also benefit. But much of that investment would have happened anyway, according to some economists.

Retailers will get a boost, too, not because of business tax breaks but because of consumer spending. Two thirds of the money in rebate checks sent to spark the economy after the Sept. 11, 2001, attacks was spent within six months.

Many business people had hoped for other provisions that they say would have provided a longer-term boost to the economy. Renewable energy advocates had sought an extension of tax credits for wind and solar; those credits expire at the end of this year, and they say that new projects could soon start to slow down because of uncertainty about the fate of the credits.

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