Tue, Oct 30, 2001 page19

• US Congress dithers over economy

  The US political parties' bills to try to alleviate the downturn resemble partisan wish lists more than sound economic theory

  • NY TIMES NEWS SERVICE
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  In the first weeks after Sept. 11, Democrats and Republicans both spoke of coming to a quick agreement about lifting the nation out of its economic downturn. Passing a bill rapidly was crucial, they said, because distributing government money takes time and because the most dangerous months for the economy were likely to come toward the end of this year.

  But almost seven weeks after the terrorist attacks, the two parties are still arguing over details, and companies are still announcing layoffs. Even more worrisome to many economists -- who, like Alan Greenspan, believe it is "far more important to be right than quick" -- both the Democratic and Republican bills contain items that owe more to traditional party wish lists than generally accepted economic theories about effective ways to kick-start the economy.

  The Democrats are insisting that the government send billions of dollars of new tax rebate checks, although people who received similar checks this summer spent very little of them. The Republicans, as part of a US$100 billion bill passed by the House of Representatives, included billions of dollars of retroactive tax cuts for businesses, although economists say such cuts provide little incentive to spend money now.

  

  Almost seven weeks after the terrorist attacks in the US, the Democrats and Republicans are still arguing over details about lifting the nation out of its economic downturn. Above are some of the thousands of people who lined up for a recent job fair at Madison Square Garden in Manhattan, New York.

  PHOTO: NY TIMES

  Even some of the combatants are concerned. "There are proposals on both sides that have no immediate stimulative effect," Pennsylvania's Republican Senator Rick Santorum, said recently. "Putting things in a package for economic stimulus that does not stimulate the economy is simply a luxury that we can't afford."

  The result, economists say, could be a compromise bill that leaves the country with bigger deficits down the road while failing to provide much of its stimulative lift until next year. "The economy is most desperate in October and November and December," said Richard J. DeKaser, the chief economist at the National City Corp, a large bank based in Cleveland. "When we need all that dough is right now."

  It may seem odd that the timing of economic activity is considered so important. After all, a few million dollars spent six months from now could help create just as many jobs as a few million dollars spent tomorrow.

  But recessions -- and few analysts doubt that the US is now in one -- tend to feed off of themselves, as layoffs lead to cuts in consumer spending that lead in turn to new layoffs. Borrowing from tomorrow's growth can halt that vicious cycle.

  In the current political climate, there is another reason to prime the pump, economists say. Buffeted by the attacks themselves, the recent anthrax letters and the prospect of a long war, Americans say they are considerably less confident about the future than they were before Sept. 11. When a nation is less confident, it tends to spend less money and have less resolve.

  "This is not a time the economy should be weak," said Peter L. Bernstein, a consultant to large investors and the author of Against the Gods: The Remarkable Story of Risk. "We're moving into a situation that's very scary," Bernstein said. "We have to give people a sense that this is going to be turned around."

  The bills now in Congress, however, may not achieve that end. If low-income families deserve government money for reasons of economic fairness, for example, then sending them rebate checks of up to US$600 seems to make sense. At a cost of about US$14 billion, both the Republican-written House bill and a proposal made by Senate Democrats would send such checks to families who did not pay enough income tax to receive the full rebate already.

  And if corporate tax burdens are so high as to make the economy inefficient, then cutting those taxes also makes sense. The House bill would spend about US$30 billion giving companies various tax breaks based mostly on past profits and investments.

  But economists have arrived at an unusual degree of consensus, based on how much stimulus the bills might provide, that this legislation is too timid.

  Take the rebate checks. According to a study by the University of Michigan, Americans have spent about 20 percent of the US$38 billion in rebates that the Treasury Department sent out this summer, in the government's first attempt to hasten a recovery this year.

  That's a much worse response than the first President Bush got from his modest stimulus program, almost a decade ago. In March 1992, he reduced the amount of money the federal government took from people's regular paychecks, giving many families nearly US$60 extra each month.

  Even though the extra money would later come out of their tax refunds, or be added to their tax bills, people spent more than 40 percent of it, according to a study by the same Michigan professors, Matthew Shapiro and Joel Slemrod.

  A similar payment method could work now, Slemrod said, because people seem less likely to save money that appears in their regular paycheck rather than as a lump sum.

  Even more popular among economists are new incentives for consumers and businesses to spend money immediately.

  The corporate tax cuts in the bills could be skewed more heavily toward incentives for future investment, rather than refunds of past tax payments.

  The House bill contains US$40 billion worth of such incentives, and the Senate plan has US$15 billion.

  In addition, the federal government could reimburse states for temporary cuts in their sales taxes, as Alan Blinder, the former vice chairman of the Federal Reserve, has suggested. Almost every item in the country would effectively be on sale, presumably causing people to make immediate purchases they would otherwise not.

  That, say economists straining to be heard, is stimulus.?
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