A Stimulus Package We Didn't Need
By Howard Gleckman
The 2001 economic stimulus package is dead. After months of talks, Congress and President Bush failed to reach agreement on the details of a package. So, with Christmas looming, lawmakers are simply going home. But for all the hand-wringing in Washington about what a tragedy the failure to achieve a compromise has been, the economy will likely get along just fine without this hodgepodge of tax cuts.
The version passed by the House in the wee hours of Dec. 20 would have cut taxes by $86 billion in 2002, but it also would have cut an additional $127 billion during 2003 and 2004 -- long after the economy is likely to be back on track. It would have done a few good things, such as extend unemployment benefits and provide a modest incentive for companies to resume buying capital equipment. But it also included billions of dollars in special-interest tax cuts that had nothing to do with real economic stimulus.
"WORSE THAN DOING NOTHING."
. And that, ultimately, was the real problem. Neither the House plan nor the Democratic alternative would have done much to jump-start the economy. And because the House version would have cost well in excess of $200 billion over just the next three years, it ran the risk of worsening an already difficult budget situation. That, in turn, could have driven skittish bond traders to raise interest rates, wiping out much of the tax cuts' benefits.
Few economists are mourning the plan's demise. The package was "worse than doing nothing," grumbles Steve Moore, president of the conservative Club for Growth. "I would vote for nothing," echoes Robert Reischauer, president of the Urban Institute, a middle-of-the-road Washington think tank. "Gridlock is golden."
Moore and Reischauer strongly disagree about what was wrong. Moore hates the bill because it didn't provide enough incentives for business investment. Reischauer blasts it for not putting enough money in the hands of consumers. But for both, it had long since lost any real value.
Even White House economists had trouble mustering much enthusiasm. They argued that a failure to pass a bill would lower growth by about 0.5% next year. But that suggests the stimulus would have boosted the economy by only about $50 billion -- a pretty poor return on a $86 billion investment.
Private economists doubt the package would do even that much. Stuart Hoffman, chief economist of PNC Financial Services Group in Pittsburgh, would still like to see a stimulus. But he figures it would add only 0.25% or 0.3% to growth. Says Hoffman: "It would be nice to have, but it's not critical for a recovery."
One reason is that its symbolic value has faded. In September, Americans feared the economy was headed for free-fall. As more time since September 11 passes, there's much less concern. "Three months ago, it was important that people felt the government was going to do whatever it took to keep the economy going," says University of Michigan tax economist Joel Slemrod. "Today, that's definitely less important."
In fact, the economy seems to be well on the way toward righting itself. A year's worth of interest rate cuts by the Federal Reserve, a 30% decline in energy prices since September 11, and a solid decline in inventories has the economy poised for recovery -- with or without more stimulus.
Indeed, a belated growth plan could be counterproductive if it ends up overheating the economy. "You'll see a recovery long before any of these provisions could have taken effect," says former Congressional Budget Office Director Rudolph G. Penner. "Passage would only hasten the day when the Fed has to start raising rates again."
Congress may try again in January with a scaled-back stimulus plan. But for many economists and business executives, it hardly matters whether the lawmakers pull it off. "There was an opportunity for a timely and well-designed stimulus package, but it has passed us by," says Brookings Institute economist Peter Orszag. "They blew it."
Gleckman is a senior correspondent in BusinessWeek's Washington bureau. His Washington Watch column appears weekly, only on BusinessWeek Online
Edited by Beth Belton
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