Fiscal stimulants

What’s needed to stimulate the economy and avoid recession? Inevitably, people in Washington, whether in Congress or on K Street, answer that question according to the constituencies they represent.

Some senators and lobbyists say that reducing ethanol tariffs will give the economy a jolt. Others call for improvements to rural schools and roads, or investments in battery technologies for electric cars.

Others argue that Wall Street firms Citibank and Merrill Lynch should be granted the right to carry back huge losses to offset taxes paid in previous years. Since those losses are largely a result of the sub-prime mortgage crisis in the housing market, advocates say such a provision is appropriate and would also spur economic growth.

Some of these floated proposals have merit. Some might even help the economy. But they also carry risk.

As they move forward on a stimulus package, leaders and rank-and-file members of Congress need to be careful not to overload a package that would add further to the national debt but might not do much to ward off economic ills. The grab bag of tax incentives and spending projects many are trying to throw aboard the fastest-moving legislative train in Washington contains mostly those provisions that are desired by special interests regardless of whether there is a bear or bull market.

Few would seem to meet the three “T’s” that Democratic leaders and President Bush say should guide an initial stimulus package: targeted, timely and temporary relief.

Many would also be difficult to pay for.

The stimulus package offered by Senate Finance Committee Chairman Max Baucus (D-Mont.) would offer all taxpayers, regardless of income, a rebate of at least $500. In a bid to win support from seniors, Baucus would also give rebates to seniors who report at least $3,000 in qualifying income, such as Social Security. The AARP quickly hailed this move, as well as the Senate bill’s extension of unemployment benefits.

The bipartisan House bill is stingier, but more targeted. It does not extend unemployment benefits and would not offer rebates to wealthier Americans. It includes some business tax breaks, but they are smaller than what could come out of the Senate.

The House took this approach because it wanted to move quickly in getting money to Americans most likely to spend it and thus stimulate economic activity. They also did so to keep the bill to a size they deem appropriate.

This is critical because it will not be offset with tax increases or spending cuts. Lawmakers generally agree that because a recession is an emergency, pay-as-you-go rules may be waived. (There is plenty of irony that growth-promoting policies should be adopted only as an emergency, but that is a subject for a separate editorial.)

It is critical that leaders impose discipline on their rank and file and not allow a short-term stimulus bill to be a long-term special interest Christmas tree. This caveat applies even more to the second stimulus bill that some lobbyists and lawmakers are already eagerly talking up.