Progressive Nation

Issue date: 1/8/08 Section: Opinion

Earlier this month, Congress passed and the President signed an economic stimulus package of nearly $170 billion. This sum, amounting to around 1% of the U.S. gross domestic product, is to be distributed in the form of rebate checks, tax breaks, and mortgage refinance assistance. So who benefits?

Checks of up to $600 for individuals and up to $1200 for married couples who file jointly will be sent to individuals earning up to $75,000 and couples earning up to $150,000 in annual income (the checks begin to be phased out above those income levels). There is also an extra $300 per child. Congressional Democrats insisted that Social Security recipients and veterans earning too little to pay federal taxes should still receive the rebates. Ultimately, the bill specifies that they must merely meet a minimum income level threshold of $3,000. Thus, low- and middle-income families-as opposed to wealthy families-clearly benefit disproportionately from this stimulus package, in contrast to previous economic measures President Bush has signed.

The second major component of the measure involves tax breaks for businesses. In providing a 50% bonus deduction on new equipment purchases and raising the limit on expense deductions from $128,000 to $250,000, the bill is designed to encourage businesses to invest in equipment and boost capital spending. All businesses benefit from these tax breaks, but as small-business tax specialist Barbara Weltman puts it in The New York Times, "How many small businesses spend $250,000 a year for equipment?"

Finally, the stimulus package raises the limit on Federal Housing Administration loans from $362,790 to as high as $729,750 in expensive areas, allowing more sub-prime mortgage holders to refinance into federally insured loans. This component, which bears little relation with the tax relief nature of the rest of the package, is undoubtedly in direct response to the collapse of the sub-prime mortgage market from earlier in the year. Considering that the mortgage crisis almost certainly contributed to current fears of economic recession, this final piece of the stimulus plan brings us back to the original point of the stimulus package: to prevent or cushion an imminent recession. Thus the ultimate question: Does the package benefit the economy?

That answer is unclear. For one, the impact of the legislation is unlikely to be felt before the third quarter of 2008. Even after the checks are mailed out in May, it is not clear that the checks will significantly boost spending. If checks are saved or used to pay off debt or even spent on imports rather than on domestically produced goods, the bill's effect on spending may be quite limited. David Wyss, Chief Economist for Standard & Poor's, estimates that of the rebate amount, only "about half will go to U.S. products and services." So while the economic stimulus package may be well-intentioned, and will certainly provide concrete benefits for many, the bill's ability to fight recession remains to be seen.

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