10-13-2001
ECONOMY: The Stimulus Skirmish
What was shaping up to be a typical autumn in Congress has been
transformed by the events of September 11. Lawmakers are still tending to
the normal fall business of approving spending bills, but now they're also
debating expanded police powers and the biggest economic-stimulus plan in
a generation-one costing as much as $75 billion. Despite decidedly
different approaches by Republicans and Democrats to the stimulus plan, a
something-for-everyone package of spending increases and tax cuts appears
likely to be enacted within several weeks.
After the attacks, President Bush called for unity. He eventually found
some with fellow Republicans on the stimulus package. Concerned about
reports that the White House would give a hearing to Democratic spending
ideas, House Republican leaders visited Bush October 4 for a "Come to
Jesus" session on the Republican gospel of tax-cutting.
The President got the message. The next day, he stepped out into the Rose
Garden and recounted all of the emergency spending that had already been
approved since September 11. "In order to stimulate the economy,
Congress doesn't need to spend any more money," Bush said. "What
they need to do is cut taxes."
But even the most-ardent preachers of the tax-cut message don't have any
illusions about the outcome of the process. "It has become clear to
me that we are going to have to pay some tribute to the Democrats to get a
stimulus plan that does any good," said Sen. Phil Gramm, R-Texas.
"The question for me is whether the tribute is going to be too
high."
Despite Bush's edict, many Democrats and progressive groups are calling
for an equal emphasis on increased spending-on everything from new schools
to improved rail service. "A quick increase in government spending
will have a larger impact on the economy, on a dollar-for-dollar basis,
than will a tax cut of a similar size," the Economic Policy
Institute, a think tank with ties to labor unions, said in its
recommendations.
Democratic leaders rose to the bait of the President's comments. When
asked about the Republican preference for business tax cuts over enhanced
unemployment benefits, Senate Majority Leader Thomas A. Daschle, D-S.D.,
said: "Look, if we can bail out corporations, we ought to be able to
help working families who are facing absolutely the worst economic and
financial circumstances of their lives. We've got to be able to recognize
there's just as much value for this country to help those families as it
is to help those corporations."
Congress has already appropriated $40 billion in emergency spending,
approved a separate airline bailout bill, and committed to increasing
unemployment and health benefits for those who have lost their jobs as a
result of the terrorist attacks. But many Democrats have said that
Congress needs to do more for the hardest-hit workers, particularly those
airline workers who've lost their jobs.
Others have grander ideas. The Economic Policy Institute has recommended a
new $30 billion revenue-sharing program that would provide grants-with few
constraints on how the money should be spent-to state governments.
Although the nation's governors have not gone so far as to recommend
revenue sharing, the National Governors' Association said that the federal
government should consider boosting spending on infrastructure-a favorite
proposal of Senate Appropriations Chairman Robert C. Byrd, D-W.Va.
"The infrastructure has been allowed to fall into disrepair,"
Byrd said, arguing that such spending could provide jobs and, at the same
time, serve a useful purpose.
Even though Bush has called on Democrats and Republicans to come together
in common cause, neither side is likely to compromise its principles in
the fight over the stimulus plan. Democrats are focusing on spending
increases targeted to workers and low-income victims of the downturn.
Republicans are pushing tax cuts for business and for upper-income
Americans who pay the bulk of federal taxes. There won't be a meeting of
the minds about the best way to stimulate the economy, just a collection
of proposals from both sides, weighted according to the leverage each
holds when the vote takes place.
Even in those areas where there appears to be compromise, there is
conflict. Take the Democratic idea to cut payroll taxes for low-income
workers who didn't qualify for the summertime rebates because they paid no
income tax. The White House and key Republicans have signaled they will
accept the idea, although some aren't happy about it. "I don't
understand why we're giving a rebate to people who don't pay taxes,"
Gramm said. Likewise, Daschle and other Democrats are objecting to
Republican tax cuts that would benefit corporations and the rich, even
though they may well end up voting for these cuts.
If there is some common ground about the stimulus plan among economic
experts, it might be to forget about the whole thing. Bush economic
advisers Larry Lindsey and R. Glenn Hubbard have written about the
near-impossibility of timing a stimulus correctly, as has Alan Blinder,
former economic adviser to President Clinton and an informal sounding
board for Democratic stimulus ideas in recent weeks. Gramm, a former
economics professor, says that research has found that efforts to
stimulate the economy come an average of 18 months too late.
If the debate in Congress won't settle the question of how best to
stimulate the economy during a recession, it will at least point to some
basic principles:
On spending, Byrd represents the unreconstructed view-during a recession,
government should open its coffers to put people directly to work. As Alan
Blinder said, "When you spend $1, you get $1 of stimulus." But
opponents say that too much of this money is either skimmed off by
business owners or wasted on administrative costs of dispensing it. They
also say that public works take too long to get started to help in a
downturn that is likely to end within six months.
On tax cuts, supporters argue that a small loss in government revenue can
unlock a larger amount of spending, and thus is a better use of federal
money than public works. But opponents counter that businesses and
consumers won't spend all of their tax refunds, especially in these
uncertain times.
On who should get the money, Democrats point out that the lower and middle
classes are more likely to spend their windfall, because they have little
else to fall back on. But Republicans say that it is the rich who pay the
overwhelming share of taxes, and that it has been their spending that has
sustained the economy during the slowdown.
On timing, Democrats and some Republicans are pushing for temporary tax
cuts, along with spending (which is, by its nature, temporary). Temporary
tax cuts will emphasize the stimulative effect within the next few months,
when the economy really needs it, and guard against revenue losses later
that could cause budget deficits. But the White House is insisting that at
least some tax cuts be permanent, in order to avoid an effective tax
increase later that could throw the economy back into a recession.
With such a large piece of legislation, turf battles are inevitable.
Referring to the ongoing skirmishes between appropriators and House
Transportation and Infrastructure Committee Chairman Don Young, R-Alaska,
one House Appropriations Committee aide said, "We want to make sure
that the T&I Committee doesn't use this as an excuse for paving large
sections of Alaska." Critics of government spending say they are
worried. "This is one of the biggest cookie jars that members are
ever going to see," said Thomas Schatz, president of Citizens Against
Government Waste.
What follows is a look at some of the taxing and spending options for the
stimulus plan, as well as regulatory changes that could end up being part
of the package.
TAX CUTS
Individual Income Taxes
President Bush sold his signature tax-cut plan as a populist crusade to
return "the people's money," but it was also an effort by
conservatives to force future governments to restrain spending. Now, as
Bush reverses course and rapidly expands the size and reach of government,
the President is returning to his tax cut as a method for stimulating the
struggling economy.
The White House is recommending that the already enacted $1.3 trillion
income tax cut, which is being phased in over 10 years, be speeded up. The
cut scheduled to take place in 2004 would be moved up to January 1 or
sooner. Another option would be to move up both the 2004 cut and the one
scheduled to take place in 2006. The 2004 and 2006 cuts would each put $20
billion to $35 billion into taxpayers' hands over the next year.
One virtue of this stimulus idea is that it won't impose any added
long-term cost on the federal budget. But some critics say that postponing
the cost of the cuts to later in the decade is a poor way to implement a
short-term stimulus.
Because upper-income taxpayers pay the lion's share of income taxes, most
cuts tend to favor them-the top 20 percent of taxpayers are already
scheduled to get 70 percent of Bush's cuts. In addition, all of the
planned Bush cuts for lower-income taxpayers are to take place in January.
As a result, speeding up the tax cuts to stimulate the economy would put
cash in the hands of only the top 24 percent of taxpayers-those with
taxable income of more than about $47,000 a year (this corresponds to
gross income of about $72,000).
Some Democrats criticize this proposal as a stimulus that caters to the
rich, but in fact, most of the beneficiaries would be middle-income
families. Most of the money would go to people reporting more than
$100,000 a year in taxable income. And critics argue that the rich would
put much of an unexpected tax refund into savings, where it won't help
stimulate the economy. Senate Majority Leader Thomas A. Daschle, D-S.D.,
charges that accelerating the Bush cuts is really aimed at preventing
Congress from rolling back those reductions a few years from now-when the
revenues might be needed to keep the budget in surplus. -John
Maggs
Payroll Taxes
Flagging consumer confidence and a bid for bipartisanship have given new
life to an old Democratic proposal: extending tax relief to low- and
moderate-income earners bypassed by the tax cut Bush signed earlier this
year.
Administration officials have said they're open to giving some help to an
estimated 29 million workers who didn't have enough income to owe income
taxes, but who do pay Social Security and Medicare payroll taxes. Such a
measure could cost $16 billion to $20 billion, a Treasury Department
official told reporters in early October.
The idea has both a policy and a political rationale: Economists generally
agree that low-income earners are more likely than the rich to spend a tax
rebate quickly, rather than save it. And including a Democratic priority
in a stimulus package improves its chances for passage.
The rebate wouldn't actually lower the amount of payroll taxes credited to
the Social Security trust fund, or reduce the Social Security benefits
workers could expect to receive on retirement. So what's not to like? For
some conservatives, in a word, "redistribution." Although styled
as a "rebate" or "rollback" of the payroll taxes, most
proposals actually envision using general revenues to give cash to a new
group of workers: those who paid payroll taxes but no income
taxes.
Sen. Phil Gramm, R-Texas, complained at a recent hearing about
"giving tax cuts to people who do not pay taxes." But other
Republicans have sounded more conciliatory. House Republican Conference
Chairman J.C. Watts, R-Okla., wouldn't rule out the idea when asked in a
television debate a few days later.
Even an agreement in principle, however, could splinter over details.
Early indications are that Democrats will propose a far more expansive
rebate than the Administration is likely to embrace.
Under one oft-heard scenario, workers paying only payroll taxes would get
the same rebates offered income tax payers earlier this year: an amount
equal to taxes paid, up to $300 for individuals and $600 for couples. A
more expansive version would increase the rebates to $300 for any
individual and $600 for any couple, regardless of how much they paid in
income or payroll taxes. Some Democrats are discussing raising the maximum
rebate to well beyond the $300-to-$600 level.
Other thorny questions are already surfacing, such as whether rebates on
the share of payroll taxes paid by employers should go to employers or to
workers. -Julie Kosterlitz
New Investments
The leading tax-break option for business would allow quick tax deductions
for capital goods-computers, machine tools, and things used to produce
other things. The hope is that this would unleash a wave of new investment
in these goods. But some people, looking at empty factories and a glut of
other production capacity, question whether business leaders would pry
open their wallets in these uncertain times, even with a
write-off.
When an economic boom goes bust, one of the most troublesome effects is
excess capacity. Through the boom of the 1990s, confidence was so high
that businesses splurged on new equipment and manufacturing capacity to
keep up with the seemingly limitless growth in demand. But when demand
abruptly slowed, businesses of all types found themselves stuck with
computers and tools and factories that they didn't need. The effect was a
plunge in business investment in new equipment, on a scale that the United
States had not seen for a generation.
The downturn in investment for capital goods has been especially acute in
the high-tech sector, which by some measures was responsible for 40
percent of U.S. growth in the past decade. Makers of telecommunications
equipment, Internet servers, and personal computers are credited with
raising U.S. productivity and living standards during the boom, and now
have been through their worst downturn ever. High-tech companies have
joined forces with other capital-equipment makers to push a tax break
designed to encourage new investment.
Right now, businesses depreciate, or write off on their taxes, the cost of
new equipment, according to a schedule that is supposed to approximate the
useful life of the equipment. Cars are depreciated in five years, tractors
in three, and iron-smelting equipment in seven. Supporters of this
proposed tax break say that speeding up the rate of depreciation-for some
products, to as fast as one year-would stir business to again start
investing in the capital goods that drove the boom. An alternative would
be a simple, one-time tax credit for new investment, although some tax
specialists think that the depreciation-schedule change would be simpler
to implement.
But excess capacity-or, to put it another way, the low rate of capacity
utilization-may hinder either idea for a stimulus. In August, U.S.
factories, mines, and utilities operated at 76.2 percent of capacity, the
lowest level since 1983. The number for September, which will be issued on
October 16, is likely to show a further drop. History shows that even
after a recession ends, business needs a long time to work off excess
capacity. The average capacity utilization rate since 1967 was about 82
percent. After hitting a low of 71 percent in 1982, the rate took seven
years to return to that average, even during one of the strongest periods
of growth the United States has ever had. It may be months or years before
business is ready to invest again, even with a tax break.
To further encourage these investments, and to guard against long-term
damage to revenue, some propose speeding up depreciation rates, but only
temporarily. This "use-it-or-lose-it" approach may be a logical
compromise for business. And it has an advantage over the idea of a
corporate income tax cut, which some critics feel companies would simply
save, to help balance their books. A depreciation speed-up, if business
didn't take advantage of it, would, at the very least, not waste any tax
revenues.-John Maggs
Corporate Income Taxes
Shortly after September 11, the irrepressible Paul H. O'Neill set off a
gold rush among business groups when he recommended a cut in corporate
income taxes as a splendid way to stimulate the U.S. economy. The Treasury
Secretary had hurt his credibility that same day, with boosterish
predictions about a stock market recovery, but people took his tax
comments seriously. The U.S. Chamber of Commerce, the National Association
of Manufacturers, and other groups quickly united around his suggestion
and made it business's preferred form of economic stimulus.
Today, the corporate rate cut lags behind competing tax-cut proposals for
a stimulus package, though it is still thought of warmly in the Bush
Administration. Its fortunes waned, partly because of an effective
rhetorical attack by Democrats, and partly because of two persuasive
think-tank analyses that poured water on the idea that corporate tax cuts
were a good way to stimulate the sluggish economy.
U.S. corporations pay taxes on the income they report, with most paying at
a rate of 35 percent. Because shareholders of a company also pay
individual income taxes on corporate dividends, conservatives have long
argued that the United States effectively has higher rates of corporate
income taxes than most other developed countries, and thus puts American
companies at a competitive disadvantage.
Supporters of a corporate income tax cut argue that reducing the rate by
anywhere from 1 to 10 percentage points would stimulate the economy by
raising stock market values. Suddenly, stocks would be worth more because
companies' after-tax income would be higher. Companies would then spend
the added income-either by making new investments, or by paying it out to
shareholders, who would then spend it.
Even if a corporate cut worked, say opponents, its stimulative effect
would be tiny when compared with the large loss of government revenue. A
1-percentage-point drop in the tax rate would reduce federal revenue by
$90 billion over 10 years, but accomplish a stimulus of only $3.6 billion
to $6 billion in its first year, according to Bill Gale, a economist at
the centrist Brookings Institution. In an analysis he wrote with Brookings
colleagues Peter Orszag and Gene Sperling, Gale says a corporate cut is a
bad stimulus idea because it provides a windfall return on old
investments-firms would get refunds even if they chose not to invest in
anything new. And a corporate cut wouldn't help the many companies now
posting losses, because they won't pay taxes on those losses.
In a separate study that makes many of the same points, Joel Friedman of
the left-leaning Center for Budget and Policy Priorities argues that the
revenue lost through the corporate cut would almost entirely wipe out the
stimulative effect by pushing up interest rates. And he says that a
temporary cut, while retaining many of the problems of a permanent one,
could actively discourage new investment, because companies would want to
maximize their near-term profits and postpone expenses for when their tax
rate is higher.-John Maggs
Alternative Minimum Tax
The dynamics of the stimulus negotiations are working against long-term
tax reforms. But one exception might be the corporate AMT, which is meant
to ensure that corporations pay a minimum amount of tax, no matter how
large their deductions. The two leading proposals for a business tax
reduction-a corporate income tax cut and a write-off for new
investment-are likely to be temporary, to avoid a big loss of revenue
later in the decade. But even a short-term cut in either of these taxes
won't work without some adjustment to the alternative minimum tax. For
example, a business that got a bigger deduction for new capital goods
would still have to pay a minimum amount of tax under the AMT.
As it happens, business groups had already been lobbying this year to
repeal the AMT, which they say is mostly an accounting headache that trips
up smaller corporations. As R. Bruce Josten of the U.S. Chamber of
Commerce noted, the corporate AMT is especially confusing for business
executives because it makes the company's tax rate much harder to predict.
A temporary adjustment in the AMT to take into account other reductions in
business taxes probably won't have much revenue impact, but the cost of an
outright repeal of the AMT is small enough-$22 billion over 10 years-that
it might slip into the stimulus package.-John Maggs
Operating Losses
Along with an adjustment in the AMT, another tax revision that may be
required if companies are to take advantage of the larger business tax
cuts on the table is a change to the rules for writing off business
losses. Right now, when a company loses money, it can deduct the full
amount from the taxes it was assessed the previous two years. But if
profits were small in those two years, a company might not be able to take
full advantage of the tax write-off. Business groups such as the U.S.
Chamber of Commerce want to extend that write-off period to cover the
previous five years. Rob Leonard, former tax counsel of the House Ways and
Means Committee, said it is essential that the stimulus package make the
change to five years. "Obviously, there are going to be a lot of
companies this year recording losses," and thus not in a position to
benefit from a corporate income tax cut or investment credit. "This
provides some help."-John Maggs
Capital Gains
When people invest in something-say, a house, or some stock-they become
richer if the asset increases in value. The increase is called a capital
gain. Someone who sells such an asset to turn this gain into cash must pay
capital gains taxes. To encourage investment and help the economy, the
federal government has tended to tax capital gains at a rate lower than
income.
Congress in 1997 cut the top capital gains tax rate from 28 percent to 20
percent, and Republican congressional leaders have called for cutting it
to 15 percent. (There is a second, 10 percent capital gains tax rate that
would be cut to 7.5 percent under the GOP proposal, but it applies to
lower-income families who pay almost no capital gains taxes.) The House
passed these proposed cuts in 1999, but the Senate never acted on them.
Since September 11, some supporters of this tax cut have called for a
temporary reduction to help stimulate the economy. Under their proposal,
the rate would revert to 20 percent after a year or two.
Republicans correctly argue that a cut in capital gains taxes would induce
investors to sell their assets and finance more spending and investment
than would have occurred with taxes at higher rates. They concede that the
cut may lower government revenues in the long run, but say that the
ensuing economic activity will provide other benefits, in the form of
increased economic growth. But the only independent study to look at this
issue concludes otherwise. The Congressional Budget Office, under a
Republican appointee, estimated the $10 trillion U.S. economy would
increase by $2 billion to $3 billion a year for the first few years
following a cut in the tax rate to 15 percent. But the federal revenue
loss of $4 billion to $5 billion a year would decrease the surplus and the
pool of savings available for investment, and would end up costing the
U.S. economy through decreased growth.
Almost all of the cut would go to the rich. In 1999, the Joint Committee
on Taxation found that those earning more than $200,000 a year pay 80
percent of capital gains taxes. For the top fifth of taxpayers by income,
the average capital gains tax bill was $20,536. For the bottom 50 percent
of taxpayers, the average was $10.
Critics say that capital gains tax cuts are ill-suited for stimulus,
because the rich who would most benefit are more likely to save their
gains than would lower-income taxpayers benefiting from some other tax
cut. A temporary cut could be even worse, because investors would hurry to
sell their assets, depressing the stock market even further.
Business groups, such as the U.S. Chamber of Commerce, advised GOP leaders
to avoid touting capital gains tax cuts as a stimulus tool. Alan Greenspan
has advised against any cut, prompting many Republicans to desert the
idea, and a cut is unlikely to be part of the package.-John Maggs
Travel and Entertainment
Even though the White House has been cool toward putting industry-specific
subsidies in the stimulus package, the travel industry may get extra help.
Reps. Neil Abercrombie, D-Hawaii, and John Shadegg, R-Ariz., have proposed
legislation that would provide a $500-per-person tax credit for expenses
for travel that takes place before the end of the year and originates in
the United States. The measure, like a similar bill in the Senate, is
intended to jump-start a travel industry that has been ailing since the
September 11 terrorist attacks. "To get the industry back on its feet
is critical for all 50 states," said Shadegg spokesman John Pappas.
To focus on business travelers, Abercrombie and Shadegg have also proposed
temporarily giving businesses and self-employed individuals a 100 percent
income tax deduction on meals and entertainment expenses. This deduction
currently stands at 50 percent.
The Travel Industry Association of America, the Travel Business
Roundtable, and the National Restaurant Association have backed the two
measures. Rick Webster, director of government affairs at TIA, says he's
crossing his fingers. "We're optimistic that the Administration and
Congress are going to pay attention to the needs of the travel
industry-beyond [helping] the airlines." But Webster isn't getting
his hopes too high, since this legislation is in competition with a host
of other ideas to stimulate the economy.-Mark Murray
Welfare-to-Work
To help preserve the jobs of low-income workers during the downturn,
several business groups are promoting an extension and expansion of the
Work Opportunity Tax Credit and the Welfare-to-Work Tax Credit. Estimated
to cost $1.3 billion over five years, these tax credits, which range from
$2,400 to $8,500 per worker per year, go to businesses that hire workers
with little or no work experience.
The tax credits expire this year, and groups such as the National Retail
Federation are pushing to make them permanent, or at least to extend the
credits for five years or more. "If you don't give businesses an
incentive to hire them, you're going to see these people fall through the
cracks even more," as they compete for jobs with the recently
unemployed, said Scott Cahill, vice president for government and industry
at the NRF.
The work opportunity tax credit is available to employers hiring workers
from one of eight targeted groups, including welfare recipients and food
stamp recipients. The Welfare-to-Work Tax Credit is available for both
welfare recipients and people who are no longer eligible for welfare
because of government time limits. Although Cahill is relatively confident
that the tax credits will be extended for at least another year, he said
he's heard mixed signals from members of Congress on longer-term
extensions. Rep. Charles B. Rangel, D-N.Y., is heading up the effort on
Capitol Hill. His spokesman said he expected "broad support among
Democrats" for some form of an extension.-Siobhan Gorman
SPENDING
Aid to States
The federal government is not alone in suffering a fiscal crunch; state
governments are also feeling the squeeze. But unlike the federal
government, 49 states have a constitutional provision or state law
requiring them to balance their budgets. "Unless the federal
government assists the states with the fiscal problems they are
experiencing as a result of the weak economy, many states will be forced
by their balanced-budget requirements to take contractionary
actions-cutting spending and raising taxes-that will counteract and weaken
federal stimulus policies," according to Iris Lav, deputy director of
the Center on Budget and Policy Priorities, a liberal Washington think
tank.
The center and others have proposed a variety of solutions that would
provide direct aid to states. Lav said that the federal government could
provide immediate assistance by temporarily increasing the federal-state
match for the Medicaid program. The federal government, she said, could
provide longer-term funding to states by reinstituting a program such as
federal revenue sharing, which provided grants to states in the 1970s and
`80s. Lav said, however, that battles over the funding formula and other
issues would inevitably bog down any type of revenue sharing.
The National Governors' Association has developed its own proposal, and
has warned that states could feel a particular squeeze because they
administer many of the programs that provide help to victims of the
September 11 attacks. "While wanting to be a partner with Congress in
stimulating the economy and assisting the victims of September 11, we must
be vocal [against] any attempt to shift any unfunded mandates to our
states," Kentucky Gov. Paul E. Patton, NGA's vice chairman, said in
announcing the plan.
The governors requested that the federal government expand the definition
of "disaster unemployment assistance" to include aid for victims
of the terrorist attacks; that proposed cuts to assistance programs for
dislocated workers be abandoned; that free or low-cost health insurance be
provided to families affected by the attacks; and that the benefits for
military and National Guard personnel be increased.
Soon after the attacks, Bush announced that $11 billion was available to
provide health insurance benefits, and he proposed providing $3 billion in
new "national emergency grants" to states. Such grants,
administered by the Labor Department, would be awarded to states
experiencing plant closings or layoffs.-David Baumann
Aid for Workers
This may emerge as one of the most contentious elements of the stimulus
package, because many Republicans are pushing for tax assistance to
encourage businesses to hire workers, while Democrats are fighting for
more-direct aid for those who have lost their jobs.
Bush last week made the first move, announcing several program expansions
to help the unemployed. On October 4, he authorized an additional 13 weeks
of unemployment compensation for many workers affected by the attacks. He
also approved assistance to pay up to 75 percent of health care premiums
for laid-off workers; additional income support for others who have used
up their unemployment insurance; and a renewed effort to encourage people
to participate in federal job-training programs.
Bush's initial effort was insufficient, argues Robert Greenstein, director
of the Center on Budget and Policy Priorities, who said that only workers
laid off after September 11 would qualify for the additional weeks of
benefits and said that the health care benefits were too small. Other
analysts predict that many workers who do not qualify for expanded
benefits will end up on welfare-a program that may not be prepared to deal
with an economic downturn.
"We believe that if we're going to talk about getting the economy
revived, the very best way to do that is helping these workers get through
this rough time," House Minority Leader Richard A. Gephardt, D-Mo.,
said last week, when asked about laid-off airline workers. "And trust
me, every dollar of money you give them in unemployment or health care is
going to be spent immediately. It will immediately go back into the
economy." Senate Majority Leader Thomas A. Daschle, D-S.D., echoed
that sentiment: "Economists say that helping low- and middle-income
people through unemployment benefits, payroll tax rebates, and other
consumer-oriented measures are among the most effective steps we could
take."
But many conservatives and their allies, such as the House Republican
Study Committee, have called for a package of tax incentives to encourage
businesses to hire and retain workers. Bush last week came down squarely
on the side of tax cuts. "In order to stimulate the economy,
Congress
doesn't need to spend any more money-what they need to do is cut
taxes," he said on October 5, arguing that corporate tax cuts would
encourage investment, which, in turn, would stimulate the economy.-David
Baumann
Health Insurance
Bush proposes spending $11 billion to help the newly unemployed keep their
health insurance, but consumer advocates are already declaring the plan
inadequate. "I wouldn't even call it half a loaf. It probably doesn't
even qualify as a slice," said Ron Pollack, executive director of
Families USA.
The main complaint is that the proposed $11 billion would not be new
money. Indeed, Bush would transfer the money from the federal-state
Children's Health Insurance Program, and then states could apply for
waivers to use their unspent CHIP money to cover unemployed adults. The
problem, says Pollack, is that states have three years in which to spend
their CHIP money, so even if they don't use it all in a given year, they
can spend it the next year or the year after. And that money may be needed
now more than ever. Federal CHIP funding is falling in 2001 and 2002, at
the same time that enrollment is expected to increase, partially because
of rising unemployment.
States such as New York, which spends all of its CHIP money and which was
hoping to win unused money from other states, will be hit the hardest.
"It's not an effective way of helping a family, when you rob the kids
to pay for coverage for adults," Pollack said.
Bush is also proposing to use part of a $3 billion fund to partially
subsidize laid-off employees who want to continue their employer-sponsored
health insurance under a law that allows them to do so if they pick up the
entire cost. States would get the money in grants, and could use it to
subsidize laid-off workers' Consolidated Omnibus Budget Reconciliation Act
(COBRA) health plans. But the pot of money must also be used for other
purposes.
Many Democrats-and some Republicans-support the idea of subsidizing COBRA
and expanding its eligibility, or expanding Medicaid to cover those who
aren't COBRA-eligible. Senate Finance Committee Chairman Max Baucus,
D-Mont., and Health, Education, Labor and Pensions Committee Chairman
Edward Kennedy, D-Mass., are pursuing a proposal to subsidize half the
cost of COBRA for newly unemployed people. People ineligible for COBRA
could participate in Medicaid. The estimated cost is $16 billion over one
year. This legislation's prospects are questionable because of the
expense, and because of Bush's intention to limit new spending under his
own health care proposal.
Finance Committee members James M. Jeffords, I-Vt., and Blanche Lincoln,
D-Ark., introduced legislation last week to provide a nine-month
advanceable, refundable tax credit to help unemployed people pay for
COBRA. The subsidy would pay up to half the cost of COBRA premiums, not to
exceed $110 per month for an individual and $290 for family
coverage.-Marilyn Werber Serafini
Safety Net
Inevitably, when the economy goes south, needs increase for such
safety-net programs as food stamps and Women, Infants and Children
nutrition assistance. Last week, the Congressional Progressive Caucus
called for a $500 million increase in the WIC program. In a recent
analysis of WIC, the Center on Budget and Policy Priorities said that the
program is using outdated unemployment figures to determine its needs. The
House adopted the Bush Administration's plan to allot $4.14 billion to the
program, which would cover services to the same number of women and
infants it helped last year. The Senate provided a $110 million boost, but
even that increase was based on a projected 4.6 percent unemployment rate,
while the rate jumped to 4.9 percent in August, the center said in a
recent report. The center argued that WIC also acts as an economic
stimulus, since all of the aid to clients is spent.
Center Director Robert Greenstein suggested recently that food stamp
benefits be increased on a temporary basis, saying the program only
provides 81 cents per person per meal. A food stamp boost could be
implemented in less than two months, he said. "This proposal is well
suited for stimulus purposes, would assist low-income unemployed workers,
and also would have some benefits for the food and agriculture
sectors," Greenstein said.-David Baumann
Bioterrorism
Even before the three cases of anthrax in Florida were discovered,
lawmakers from both parties were drafting proposals to sharply increase
funding to combat bioterrorism. "There is no more important problem
facing us as appropriators than this one," said Sen. Arlen Specter,
R-Pa., ranking Republican on the Appropriations Subcommittee on Labor,
Health and Human Services, and Education.
Sen. Tom Harkin, D-Iowa, who chairs the subcommittee, said at a hearing on
Tuesday that he was working with full-committee chairman Robert C. Byrd,
D-W.Va., to develop an "aggressive anti-bioterrorism package to be
included in the emergency appropriations bill." The legislation will
address training for public health and medical professionals, expanded
food-safety inspection, vaccine stockpiles, round-the-clock disease
investigators in every state, increased hospital capacity, improved
surveillance, and information-sharing at all levels of government.
Senate Health, Education, Labor, and Pensions Committee Chairman Edward
Kennedy, D-Mass., and panel member Bill Frist, R-Tenn., sponsored a bill
that Congress passed last year-the Public Health Threats and Emergencies
Act of 2000-authorizing $540 million a year to strengthen the public
health infrastructure and to better recognize and respond to bioterrorism
attacks. Congress has not yet funded the new law, but already the two
Senators have upped their request to $1.4 billion a year.
The House Energy and Commerce Committee is also holding hearings to
evaluate the need for funding to prepare for bioterrorism.
Testifying at a Senate subcommittee hearing, Health and Human Services
Secretary Tommy G. Thompson said he is already accelerating production of
millions of smallpox vaccine doses that were originally scheduled for
delivery in 2004. Now they're expected in 2002. He's also talking to
vaccine producers about beginning production of vaccines for other
diseases that could be spread by bioterrorism. Moreover, Thompson has
begun production of two new "push packs"-50-ton emergency
stockpiles of antibiotics, vaccines, and other response materials that can
be dropped from planes, if necessary-to add to the eight collections
already strategically located throughout the country.
Another priority for the Administration will be food safety, which
Thompson said needs to be bolstered because of a lack of food inspectors
at the Food and Drug Administration.-Marilyn Werber Serafini
Mental Health
To help fund mental health programs, Health and Human Services Secretary
Tommy G. Thompson already has received $28 million that the Administration
set aside from Congress's emergency response supplemental bill. So far, he
has awarded $6.8 million in grants to those states most directly affected
by the September 11 attacks. He has convened an internal working group
that is developing a more comprehensive response to mental health
needs.
In the meantime, a bipartisan group of Senators is pushing for quick
passage of legislation that would give $175 million to public agencies
reaching out to individuals who were directly affected by the attacks. The
Senators tried to attach it to the recently passed defense authorization
bill, but some conservatives blocked the measure, arguing that lawmakers
needed to see how far the emergency money at HHS would go toward meeting
mental health needs.
Experts say that the nation's mental health system was inadequate before
the terrorist attacks and will be hard-pressed to provide assistance to
millions of Americans who may be suffering from post-traumatic stress
disorder. In addition, mental health services may be needed to help
victims of the economic downturn who become depressed after losing their
jobs.-Marilyn Werber Serafini
Public Works
Washington's road-building groups have proposed using $5 billion of the
approximately $20 billion surplus in the federal Highway Trust Fund to
build new highways. They cite estimates that every $1 billion spent on
road construction creates 42,000 new jobs.
"We are not asking for money that has to be drawn from somewhere
else. It is already there," said Taylor Bowlden, a lobbyist at the
American Highway Users Alliance. These groups-which include the Highway
Users, the American Road & Transportation Builders Association, and
the Associated General Contractors of America-say they already have
support from key Democrats and from the Senate Environment and Public
Works Committee. But they are concerned about getting support from the
House Republican leadership, which is focusing more on tax cuts than on
spending measures.
Amtrak and its congressional supporters are pushing for $3.2 billion in
emergency funds, to pay for increased security measures and improved
infrastructure (especially since Amtrak saw its ridership increase after
the September 11 attacks). Yet critics-who include some members of
Congress and groups that monitor the rail service-argue that Amtrak wants
to use this $3.2 billion to help its troubled financial situation.
According to a 1997 law, Amtrak must begin to cover its operational costs
by 2002, or face liquidation or major restructuring. The General
Accounting Office recently reported that Amtrak's chances for achieving
the mandate are "dim." Some observers don't expect the rail
service to receive all of its request. "It's hard for me to see how
they get $3 billion in emergency funds," said a Democratic
staffer.-Mark Murray
EDUCATION
The National Education Association and a variety of progressive groups
have called for drastic increases in the federal government's role in
school construction as a way to stimulate the economy. Noting that the
nation faces a backlog in school repairs, the NEA says that the federal
government's school modernization program should increase to $20 billion
from the $1.2 billion it received this year. The association contends that
each $1 billion invested in school construction would generate about
24,000 jobs. The Economic Policy Institute, a liberal think tank with
labor union support, included the same proposal in its economic stimulus
plan, while the Congressional Progressive Caucus included $10 billion for
the purpose in its stimulus package.
On the tax front, Sen. George Allen, R-Va., is pushing for a
$1,000-per-child tax credit on parents' federal tax returns for education
expenditures, such as computers and Internet service. He maintains that
the credit would provide an instant infusion into the ailing high-tech
sector. But with a price tag of $30 billion a year for two years, his idea
is a long shot. And Allen has not done much to build support, so his
proposal has had a tough time gaining traction on the Hill and in the
Administration.-David Baumann and Siobhan Gorman
In the Pipeline
In a way, the $40 billion supplemental spending plan approved by Congress
just days after the September 11 attacks serves as an economic stimulus.
The bill gives Bush a great deal of discretion on how exactly to spend the
money. As House Appropriations Chairman C.W. "Bill" Young,
R-Fla., pointed out, the money "provides significant resources to
assist rescue efforts, repair damaged facilities, and provide the
necessary resources to maintain our national security." Each of those
efforts can be an economic stimulus. For instance, Bush proposed spending
$1.8 million to install protective window film at the Supreme Court and at
the Executive Office of the President. Each of those purchases pumps money
back into the economy.
So far, Bush has decided how to spend almost $7.1 billion of the funds.
For instance, Bush said the federal government would use some $50 million
to purchase and deliver food to "vulnerable" people in
Afghanistan, Pakistan, and neighboring countries.
Bush has also authorized the Federal Emergency Management Agency to spend
$2 billion for debris removal and other efforts at the World Trade Center
site; the Small Business Administration to distribute some $100 million
worth of disaster loans; and the Labor Department to use funds for
dislocated workers to give additional help to New York City's cleanup
efforts-all moves that will pump money back into the economy.
Any additional security efforts could either harm or help stimulate the
economy. For example, additional street or airport closings could hurt
businesses that rely on that traffic.
On the other hand, the erecting of barricades around many federal
buildings could produce jobs, as could the spending of additional money
that the Bush Administration has at its disposal for security. In
addition, the airline security bill now being hashed out on Capitol Hill
may be a job creator. And organizers of the 2002 Winter Olympics have made
it clear they expect to need more help with security. "The conduct of
public safety can never be the same," Mitt Romney, president of the
Salt Lake City Olympic Organizing Committee, said two days after the
attack. The operators of the nation's water systems are also asking
Congress for help: $5 billion to increase security at water plants.-David
Baumann
REGULATION
Minimum Wage
A minimum-wage hike may be the medicine that fiscal conservatives and
business leaders have to swallow if they are to get the tax cuts their
congressional allies have proposed.
Democratic leaders, including Sens. Edward Kennedy, D-Mass., and
Christopher J. Dodd, D-Conn., are seeking a $1.50 increase in the federal
minimum wage, to $6.65 per hour over the next two to three years. The
issue has long been a priority for unions representing low-wage workers.
In a promising sign for these advocates, Ari Fleischer, Bush's spokesman,
said earlier this month that the President would consider the proposal. On
Wednesday, Bush economic adviser R. Glenn Hubbard said that while Bush is
"open" to a minimum-wage increase, "this would not seem an
opportune time" for one because "it would be harmful" to
the economy. Last spring, Republican leaders in Congress seemed resigned
to a minimum-wage increase, but said they wanted to limit it to $1 per
hour.
Business groups, led by the National Restaurant Association and the
National Retail Federation, are actively lobbying against any wage
increase. They seem to have won a key ally in the Hotel Employees and
Restaurant Employees International Union. That union announced last week
that it would lobby for extended unemployment and medical benefits in
Congress's stimulus package in lieu of a minimum-wage increase.
A study released on October 1 by the Employment Policies Institute, a
conservative think tank, argued that the $1.50 increase could increase
labor costs by as much as 30 percent and eliminate between 200,000 and
600,000 jobs. Business interests say that Congress, rather than enact a
minimum-wage increase, should reduce payroll taxes for low-wage
workers.
Advocates of the wage hike say that it will put more dollars in the
pockets of poor families who did not benefit from Bush's tax cut. Studies
done by the liberal Center on Budget and Policy Priorities indicate that
minimum-wage increases do not result in substantial job losses, but do
provide new income to low-wage earners. If the wage increase were coupled
with business tax cuts-as has been done in the past-the impact on
unemployment and small businesses would not be great, advocates say.-Shawn
Zeller
ENERGY
Conservative Republicans who have relentlessly pushed for new oil and
natural gas exploration on federal lands are eyeing the economic stimulus
package as a potential vehicle for their proposals. After all, the House
energy bill, passed in August, was promoted as a jobs package.
Representatives of unions and the oil industry said that a provision in
the House bill to allow oil drilling in Alaska's Arctic National Wildlife
Refuge would provide 735,000 new jobs, most of them outside Alaska.
(Opponents say those numbers are wildly inflated.) Senate Democrats, who
are now drafting their own energy package, are less sympathetic to the oil
industry's demands. And environmentalists strongly oppose drilling in
Alaska.
In September, Sen. James M. Inhofe, R-Okla., tried to force Senate
Democrats to agree to an Alaskan oil-drilling provision by blocking a
defense authorization bill. Inhofe's maneuver failed, but industry
officials say they'll continue to look for new avenues to win adoption of
the proposal. Some industry lobbyists also want the stimulus package to
help fund a $10 billion natural gas pipeline from Alaska's North Slope to
the lower 48 states. However, despite industry's support for the energy
proposals, lobbyists conceded that the Bush Administration has been cool
to the idea of including those provisions in economic stimulus
legislation.-Margaret Kriz
Liability
As political pressure mounted to pass an airline bailout package,
congressional leaders decided to keep the measure simple by tailoring its
provisions to the airline industry, rather than drafting broader-and
more-controversial-protections against losses from terrorism. But given
the warnings of additional terror attacks to come and further financial
losses, the battles that congressional leaders initially tried to sidestep
are already resurfacing.
"We've been extremely busy on the Hill," said a spokesman for
the American Insurance Association, which wants the federal government to
act as a "backstop" against massive insurance losses from
terrorism. For insuring against terrorism risks, the AIA urges the
creation of a privately run and privately financed reinsurance pool-that
is, a source of funds that would be used to pay for damages related to
terrorist attacks. The government would step in with funds of its own only
when the pool's available funds had been reduced by 80 percent. For war
risks, the AIA would like to see the federal government become a direct
insurer, using money from premiums for policies that private companies
sold in the marketplace. Another option being discussed is to use a
terrorism risk pool to cover war-related claims for worker compensation.
The AIA proposal is championed by Sens. Christopher J. Dodd, D-Conn., and
Charles E. Schumer, D-N.Y., but it has faced skepticism from Republicans
who are uneasy about making taxpayers liable for large economic
losses.
In the meantime, some business interests-led by the U.S. Chamber of
Commerce's Institute for Legal Reform-are preparing to push for
protections against terrorism-related lawsuits. The chamber and its allies
have not settled on a specific proposal, said Matthew Webb, the
institute's director for legal reform policy. But Webb added that the
chamber would probably seek a measure of protection for such businesses as
building owners, security firms, and manufacturers of construction
materials, in case they are served with lawsuits arising from terrorist
attacks.
However, veteran tort reform advocates don't see much momentum for
sweeping changes-at least not right now. "I think that because of the
tragic and very sensitive nature of this event, neither the plaintiffs
lawyers nor the defense lawyers want to do anything that appears to be
opportunistic or insensitive," said Mark Behrens, a partner with the
law firm Shook, Hardy & Bacon, whose clients include the American Tort
Reform Association.
Indeed, while the Association of Trial Lawyers of America-the influential
group that represents plaintiffs attorneys-is keeping an eye out for
efforts by its adversaries to restrict lawsuits, the group is focusing
more intently on the fallout from the September 11 attacks. Shortly after
the attacks, ATLA established a moratorium on lawsuits, and it
subsequently pledged its members' pro bono services to help victims and
survivors of the terror attacks to secure compensation from a new federal
victims' fund.-Louis Jacobson
Trade-Negotiating Authority
Pulling out all the stops in its efforts to obtain trade-negotiating
authority from Congress, the Bush Administration has linked immediate
congressional action on this issue to efforts to counter the economic
downturn here and abroad. But the economic evidence in support of its
cause is dubious at best.
In a Washington Post op-ed piece on September 20, U.S. Trade
Representative Robert B. Zoellick argued, "Congress needs to enact
U.S. trade-promotion authority so America can negotiate agreements that
advance the causes of openness, development, and growth." House
Majority Leader Dick Armey, R-Texas, has echoed these themes, calling for
trade-promotion authority to boost the economy.
But the most recent major international trade negotiation-the Uruguay
Round-began even though then-President Reagan did not have such
negotiating authority. Moreover, any future negotiation would likely take
three to five years to complete. Thus, any possible economic boost would
come long after the current recession.
To bolster his argument for the economic benefits of trade-promotion
authority, Zoellick said that the average American family of four was
$1,300 to $2,000 richer because of the North American Free Trade Agreement
and the Uruguay Round, both of which brought lower tariffs and higher
incomes.
But these estimates do not reflect data based on actual experience. They
are based on economic forecasts made before these two trade agreements
came into force. Moreover, the estimates come from the same economic
models that predicted that NAFTA would generate a U.S. trade surplus with
Mexico. Last year, the United States ran a $34 billion trade deficit with
Mexico.
In the spirit of bipartisanship in the wake of the September 11 terrorist
attacks, Congress may yet approve presidential trade-negotiating
authority. But such an action would contribute little to any recovery from
the economic downturn.-Bruce Stokes
Banking
The thrift industry says it knows how to help small business without
costing the Treasury a dime: Let banks and thrifts pay interest on
commercial checking accounts.
Right now, a 1930s-era law prohibits such payments, but large banks have
long since found a way around the ban-they set up "sweep
accounts" that transfer a customer's funds from interest-paying
money-market accounts into checking accounts, as needed. Small banks and
thrifts say they can't easily do the same, because of their smaller cash
flow. And because big banks tend to serve Big Business, they argue, the
law puts the little guys at a disadvantage.
A measure that included the repeal passed the House earlier this year but
was expected to run afoul of Senate Banking Committee member Charles E.
Schumer, a Democrat from New York-home to the biggest of big banks. The
committee did pass the measure as part of a broader regulatory relief bill
in the previous Congress, and it has the support of most federal banking
regulators. But some small thrifts and banks, which consider paying
additional interest too costly, oppose it. And although small-business
groups support the measure by itself, some prefer not to tinker with
Bush's stimulus proposal. One Senate aide termed the economic benefits of
the measure "small potatoes," but said it was not out of the
question that the measure could end up in a stimulus package.-Julie
Kosterlitz
John Maggs and David Baumann
National Journal
