With Economy Lagging, Stimulus Package in the Works

As the Senate returns to work this week, its members are sure to join their counterparts in the House of Representatives in an effort to hammer out an agreement on an economic stimulus package that will prove acceptable to the administration of President George W. Bush.

Probably the most prominent measure being discussed is a financial rebate to taxpayers, but Republicans and Democrats differ on how much to give and to whom. Republicans have thus far advocated sending out rebate checks only to those Americans that pay income taxes, while Democrats have proposed putting money in the hands of those who need it most, saying it is those individuals who are most likely to spend it and help the economy grow stronger.

Brian Riedl of The Heritage Foundation, a conservative think tank based in Washington, D.C., writes in a web backgrounder that tax rebates do not stimulate the economy, arguing instead that what the country needs is tax rate reduction. Riedl says that high tax rates stifle economic growth and that tax rebates fail to solve this problem because they do not promote increased productivity or wealth creation.

Additional measures being considered by Republicans and Democrats include tax credits for businesses, lengthier unemployment insurance benefits, increased food stamp benefits, and increased Medicaid payments at the state level. Given the variety of choices available, it is likely that there is significant room for compromise between the two parties.

While Congressional leaders hope to have a stimulus package ready to go to the President for signature by the end of next month, history has shown that such measures typically take longer to become effective. And given that any economic stimulus will suffer from a time lag before having any impact, it could be quite a while before Americans benefit from whatever measures are finally approved, even if the President signs legislation in early March.

Economic stimulus proposals are being offered at a time when many Americans fear the economy is facing a recession, sparked in part by the subprime mortgage crisis and the slow down in the U.S. housing market. Lee Hudson Teslik of the Council on Foreign Relations writes in a daily analysis brief that the ramifications of a U.S. recession include decreased foreign trade, increased susceptibility of American businesses to hostile foreign takeovers, higher domestic job losses, and renewed debate about the billions of dollars spent each month on the wars in Iraq and Afghanistan.

In an election year deemed as critical by both Republicans and Democrats, Congress and the White House are likely to move as quickly as possible to head off an economic recession and allay the fears of American taxpayers.

Sources: Heritage Foundation, Council on Foreign Relations