The major public policy players in Washington appear to be lining up in support of a fiscal stimulus package to help jump-start the ailing U.S. economy.

Professor Emeritus David E. RePass of the University of Connecticut once said that, "Congress doesn't react, unless not reacting will result in the Congress bearing the wrath of the American voter."

In this instance, it looks like the Congress has heard about, or has at least taken the pulse of economic conditions in their home districts, and is set to act on a stimulus package. And, by all accounts, it looks like they may do it in near-record time. (The late writer Mark Twain would add here, "Famous last words.")

Fiscal stimulus: full speed ahead

House Speaker Nancy Pelosi, D-California, said she expects to introduce an economic stimulus package after she meets with President Bush next Tuesday, CBS News reported. Further, on Friday, President Bush outlined a proposed $140 billion stimulus plan, which will include tax cuts and other tax credits, The Wall Street Journal reported. In his statement Friday, Bush did not provide specifics, but lawmakers close to the White House said the administration is set to propose tax rebates of $800 and $1,600, for individuals and households, respectively, and is set to provide businesses with a 50% tax deduction for new equipment purchases, The Journal reported.



Bush's outline came a day after U.S. Federal Reserve Chairman Ben Bernanke said in testimony before the House Budget Committee that a fiscal stimulus package that was timely, targeted, and temporary would help stimulate the economy, in conjunction with monetary policy easing. (The Fed is widely expected to lower key short-term interest rates -- possibly by as much as 50 basis points -- for the fourth time in nine months when it meets later this month.)

Also, earlier this week the Congressional Budget Office said in a report that quick, fiscal stimulus action by Congress would provide a boost to the U.S. economy just when it's most needed. The CBO added that the most effective plan would allocate money to those who are most likely to spend it, particularly low-income and lower-income families. The CBO cited numerous case studies of similar stimulus plans that boosted economic growth, the most recent being the tax cuts and rebates approved to address the economic slump that followed the September 11, 2001, terrorist attack on United States.

How much is enough?

As White House and congressional officials started work on a bill that will begin working its way through Congress, debate continued in economic circles regarding how large the fiscal stimulus would need to be to substantially improve economic growth and/or prevent a recession.

Economist Nouriel Roubini, chairman of economics web site RGE Monitor, said the stimulus package would have to be as large as $300-$400 billion to counteract the contraction effects of the housing sector's correction and accompanying credit market distress, and he doubted that Congress would be willing to approve a stimulus package that large.

Other economists disagreed. Economist David H. Wang told BloggingStocks on Friday that a fiscal stimulus package around $150-$175 billion "would have a significant stimulus impact."

"A $175 billion package will not be a panacea, but it will begin the process of recovery, provided the money goes to people who are likely to spend it, low-income and middle-income taxpayers," Wang said. "Not everyone will spend their tax cut or rebate, but many will, and this will provide an economic boost, and one that is needed."

Wang added that the proposed 50% write-off for businesses who purchase new equipment will also provide "a sizable economic boost."

"A lot of businesses, sensing tougher economic times ahead, are holding off purchases of equipment, and that in and of itself has a contractionary effect," Wang said. "But if you dangle before businesses a 50% write-off for new equipment, it's amazing how many businesses will suddenly say 'You know, this may be a good time to upgrade or add new computers, or replace machinery.' And that, of course, will stimulate the economy."

No panacea

Economist Steve Affinito said the proposed fiscal stimulus "is not the end of our immediate economic concerns," because the U.S. economy faces major economic headwinds in housing mortgage defaults, high oil prices, and tepid job growth. Further, Affinito underscored that the financial markets and policy makers still do not know the full ramifications of subprime mortgage default and related asset losses. There undoubtedly "will be more unpleasant waves in the quarters ahead" as bad assets are recognized, written down or written off, he said.

"The fiscal stimulus package, by itself, will not prevent a recession. But the fiscal stimulus, combined with monetary policy easing by the Fed, and a mortgages assistance package to reduce the number of foreclosures, will go a long way toward getting the economy headed in the right direction...toward addressing long-standing macroeconomic ills," Affinito said. "And if we can catch some luck with a drop in the oil price in 2008, that will be another boost for the economy." Affinito favors a $250-$300 billion stimulus package but believes Congress will probably pass a $150-$175 billion package.

And for those who argue against a fiscal stimulus package, Affinito has a quick rejoinder.

"Just think about what the U.S. economy will look like later in 2008 if we don't pass a stimulus package," he said.