The Debate Over How and How Long
WASHINGTON — If President Bush becomes convinced the economy is indeed headed toward a recession, he is likely to respond much as he did on entering office in 2001 with the economy on the verge of a downturn: lower tax rates for people at all income levels and provide tax breaks for businesses.
But this time around, Democratic leaders in Congress are planning to push back with a very different strategy. While many Democrats can be expected to favor at least some tax cuts, they will seek temporary measures that are aimed at low- and middle-income Americans.
In an election year, the big fight between Republicans and Democrats is not expected to turn on whether the government should stimulate the economy. It is not even likely to be over the relative merits of tax cuts versus bigger spending.
The real battle will probably be over short-term goals versus long-term measures.
As Mr. Bush suggested in his speech on Monday, his top economic priority remains extending the tax cuts he began in 2001 and 2003 well beyond 2010, when they are scheduled to expire.
“In a time of economic uncertainty, we don’t need to be taking money out of your pocket,” Mr. Bush told business leaders at the Union League Club of Chicago. “The smartest thing we can do is to keep taxes low.”
By contrast, Democrats have a fundamentally different approach. Though economists who support the Democrats are divided about whether the economy even needs a boost, they almost universally are talking about temporary moves to support the people most likely to be hurt by a downturn. Those could include an increase in unemployment benefits, food stamps or job-training assistance; a temporary cut in the payroll tax for Social Security; and a tax rebate for middle- and lower-income workers.
Democrats themselves are divided into separate camps. Some, including former top officials from the Clinton administration like Robert E. Rubin and Lawrence H. Summers, continue to place a top priority on fiscal discipline and shrinking the federal budget deficit.
But another camp argues that the Clinton wing is too fixated on budget-balancing. By contrast, this group supports a big expansion of public infrastructure spending on highways, bridges, airports and other capital projects.
Democrats also differ widely on the amount of money that Washington should throw at the problem. Mr. Summers, in a recent speech to the Brookings Institution, proposed measures that might cost $75 billion over the next six months or so. Others argue that a stimulus package should cost at least $250 billion if it is to have any real impact.
Mr. Bush said his administration is looking at options to help the economy through a downturn, but he has also said he will not decide on any proposals until his State of the Union speech at the end of this month.
On Monday, Mr. Bush devoted much of his speech to warning that Congress should make his tax cuts permanent. But that change would do little to forestall a recession, because the tax cuts do not need to be extended for another two years.
Martin S. Feldstein, a professor of economics at Harvard and an adviser to many Republicans, has warned that the risks of an actual recession are now greater than 50-50. Mr. Feldstein recently suggested that policy makers devise a “contingent” stimulus package that would be set in motion if the nation’s employment declines for three months in a row.
Kevin A. Hassett, director of economic policy at the American Enterprise Institute, a conservative research group, argued that Congress should offer additional tax breaks for business investment and perhaps even lower the corporate tax rate.
During the last downturn, Mr. Bush supported “bonus depreciation” that let corporations deduct the cost of new equipment more rapidly, as well as a temporary measure that let small businesses immediately write off up to $125,000 in equipment spending.
“They’re reliable, they’re tried and true,” Mr. Hassett said, referring to tax cuts for business investment.
But Democratic lawmakers, who have majorities in both the House and Senate, are almost certain to insist on measures aimed at middle-income and poor families.
“It’s very important that a significant share of any tax reduction go to middle- and lower-income people,” said Douglas W. Elmendorf, an economist at the Brookings Institution who worked in the Clinton administration. “They are living closer to the edge than most people. But also, tax cuts to them would have the most macroeconomic punch. You want to direct the tax cuts to people who are spending everything that’s coming in.”
Mr. Elmendorf, who will join Mr. Rubin at a Brookings conference on Thursday about stimulating the economy, said he was not yet persuaded that any special measures were necessary. But if they are, he said, they should be “timely and targeted and temporary.”
Several temporary measures could meet those criteria, and Democratic lawmakers are already starting to discuss them, according to Congressional staff members.
Almost any stimulus package is likely to include an extension of unemployment benefits, which normally end after a person has been jobless for 26 weeks. Similarly, lawmakers are likely to propose an increase in the food stamp program.
Democrats have long wanted to expand the Trade Adjustment Assistance program, which offers help to workers in factories that close down because of foreign competition. Others have suggested a new program of “wage insurance,” under which the government would temporarily compensate workers who are forced to take lower-paying jobs at different companies.
Democrats and Republicans are both likely to be drawn to tax rebates. Mr. Bush’s tax-cut package of 2001 included a one-time rebate to taxpayers that supporters said stimulated consumer spending at a time when unemployment was rising.
But many economists criticize one-time tax rebates, because people who are not in dire financial straits will typically save a portion of their tax rebate. Those with higher incomes tend to save more, so rebates to higher-
income households have less immediate impact on economic activity.
Mr. Zandi estimated higher unemployment benefits had the biggest impact, generating $1.73 in demand for every dollar spent by the government. By contrast, he estimated, reducing marginal tax rates for all income levels generated only 67 cents of extra demand for every dollar in lower taxes.
In the last recession, Mr. Bush made it clear he was far less interested in temporary stimulus than in advancing his long-term agenda of extending lower tax rates indefinitely. R. Glenn Hubbard, then one of Mr. Bush’s top economic advisers, went so far as to avoid the word “stimulus” because it sounded too much like trying to fine-tune the economy.
Democrats now have a similar battle in their own camp between temporary and long-term measures.
A growing camp of Democrats, frustrated by the Clinton-Rubin focus on fiscal discipline, are pushing for a big, broad increase in spending on highways, bridges, mass transit and other infrastructure.
“It would mean much more of the stimulus actually goes to creating jobs,” said Sherle R. Schwenninger, head of the economic growth program at the New America Foundation, a policy research group dominated by Democrats.
Bernard L. Schwartz, a wealthy industrialist who has contributed heavily to the New America Foundation, has championed the idea as a way both to stimulate the economy and increase its long-term efficiency.
With a possible recession looming, Democratic leaders in Congress are beginning to talk about a mix of targeted tax cuts and new spending projects. But Congressional Democrats are constrained by their insistence on paying for new spending and new tax cuts with savings in other areas. Though lawmakers can waive the “pay as you go” restrictions to deal with an economic emergency, fiscal conservatives will be reluctant to do so.
In the end, even if Congress does manage to pass a spending package, Democrats may still find themselves in a stalemate with President Bush, who has already vetoed numerous bills that exceeded his spending limits.