Stimulus would help, but maybe not enough

This would be the second round of tax rebates for the Bush administration. In 2001, when the economy briefly hit a period of mild recession, the White House crafted a tax plan that paid out $300 per person or $600 per household.

But it’s not clear whether another round of rebate checks would revive an economy laid low by a prolonged housing slump and a credit crunch that seems to be stubbornly resistant to Federal Reserve interest rate cuts. A lot depends on just how bad the current downturn turns out to be — something that might not be known for months.

Given the short timetable being discussed by Congress and the White House, it’s also not clear whether a compromise spending plan would be offset with cuts elsewhere in the budget, a task that would be much more difficult. That means the billions spent on tax rebates would add to the budget deficit. But if the short-term spending succeeds, supporters say, it could pay for itself by raising tax revenues that might otherwise be lost if the economy falters.

An extra few hundred dollars could have an immediate impact on family budgets, said Nariman Behravesh, chief economist at Global Insight.

“There are a lot of people struggling to pay their bills — that’s very evident," he said. "This will help them.”

But it remains to be seen how quickly that money flows through to the broader economy. Behravesh estimates that half the money will be spent quickly, so a stimulus package of $150 billion would add no more than a half-percentage point to GDP.

"There are no silver bullets," said Paulson in a briefing with reporters.

Some economists argue that money from emergency government spending packages — even when handed directly to consumers — may not provide even the limited boost Congress and the White House are hoping for.

Some consumers will likely use the money to pay down their credit cards, for example. So while people who get a permanent raise may increase their levels of spending, that’s not usually the case for people who get a one-time payment like a bonus at work, according to Carnegie Mellon economics professor Marvin Goodfriend.

“In general people don’t respond by spending those windfalls — they save most of them,” he said. “It’s highly unlike that this will have big effect on current spending even if it is targeted to those who really are in dire straits.”

Though the bulk of any federal package is expected to be used for rebate checks, which spread the most political goodwill, the biggest bang for the buck would come from extending unemployment benefits, according to a study by Moody's Economy.com, which found that each $1 spent on unemployment benefits yields $1.73 in new spending over the first year.

"Extending unemployment benefits helps bolster confidence," said Mark Zandi, chief economist at Moody's Economy.com and the author of the study. "If people start running out of their unemployment benefits, they cut back drastically on their spending, and it also scares people around them. It is very debilitating on consumer confidence."

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