Great article posted on Wall Streets Journal. Stimulus Package Unveiled
- $825 Billion Plan Includes Business Tax Breaks; Senate Releases Cash for Bank Rescues
By NAFTALI BENDAVID, ELIZABETH WILLIAMSON and SUDEEP REDDY
WASHINGTON -- House Democrats Thursday rolled out the details of an $825 billion economic stimulus package to combat what they called "a crisis not seen since the Great Depression," but its immediate economic impact is unclear and the plan faces hurdles before becoming law.
Details of the two-year package, which calls for $550 billion in new spending and $275 billion in tax relief, will likely change as the bill works its way through Congress. But the document provides the first blueprint of how President-elect Barack Obama and congressional Democrats plan to fight the historic economic downturn, which has already wiped out 2.6 million jobs.
Businesses would get "bonus" depreciation for investing in new plants and equipment. The proposal also allows companies that have losses this year to get refunds for taxes paid as far back as 2003; current tax rules allow losses to be carried back only two years. But companies receiving money from the financial-system bailout program are ineligible for the tax provision, a blow for some of the nation's big banks and troubled auto makers General Motors Corp. and Chrysler LLC.
The stimulus plan was released hours before the Senate backed Mr. Obama on another key measure by approving the Treasury's call for the release of the second half of the $700 billion financial-system rescue package. That program is being replenished as Bank of America Corp. was near an agreement with U.S. officials that would provide it with $15 billion to $20 billion of fresh capital.
The plan would be one of the largest single government expenditures in U.S. history, and would be equivalent to about 3% of gross domestic product over two years. The proposal is $125 billion bigger than the controversial bailout for the financial-services industry. It outweighs in dollar terms all other nations' stimulus plans, though China's $600 billion stimulus is a larger share of its economy.
Democrats said they emphasized government spending over tax relief because that was the best and fastest way to create jobs. Rep. David Obey (D., Wis.), chairman of the House Appropriations Committee, warned that the package may be insufficient -- and said another spending bill may be needed later this year.
Some of the biggest expenditures will go directly to the states, with $90 billion going to increase the federal share of Medicaid payments and an additional $79 billion to help states avoid cutbacks in education and other services. Separately, $43 billion will go for transportation improvements -- less than many expected, to the frustration of some Democrats.
The plan also includes Mr. Obama's "Making Work Pay" tax credit of $500 per worker and $1,000 for couples.
Economists say the stimulus may be more effective at supporting an ultimate recovery than arresting the current decline. That's because few elements of the package would hit the economy before the second half of the year, with the largest boost coming in late 2009 and into 2010.
By then the U.S. is expected to show slow growth, as a result of other stimulus from the Federal Reserve and Treasury. The unemployment rate, which hit 7.2% in December, is widely expected to hit 8% by the end of the year -- but without any stimulus, some economists fear it could rise into double digits.
Macroeconomic Advisers, a forecasting firm, estimated Thursday that a plan of $775 billion stimulus over two years would boost GDP by 3.2%, reduce the unemployment rate by 1.7 percentage points and raise employment by 3.3 million jobs.
The Democrats' plan provides incentives for businesses to make capital expenditures. The "bonus" depreciation provision, for example, would provide immediate relief for businesses that invest in new plants and equipment by speeding up depreciation deductions. The package doubles the amount small businesses can immediately write off for capital investments and for purchasing new equipment and includes incentives for businesses to invest in renewable energy.
The transportation and energy projects in the package could have among the slowest impact on the economy, economists said. Even "shovel-ready" projects could be delayed as local and state governments allocate funds, receive bids and award contracts.
The quickest effect, in contrast, could come from tax cuts, particularly if the government reduces payroll taxes immediately to get funds to taxpayers. That could raise spending and get money flowing through the economy quickly, even if some of the funds are likely to be saved rather than spent.
The plan's final shape will depend not only on horse-trading among lawmakers in the House and Senate, but also on the outcome of the lobbying frenzy now under way.
Already some winners and losers are emerging. Among the potential losers are big banks and other businesses that have received government money under the Troubled Asset Relief Program, the $700 billion program designed to bail out the financial-services industry.Companies that took TARP funds are excluded from the provision allowing companies to apply current losses to tax returns filed in the past five years, instead of the current two.
"To exclude TARP recipients is to ignore a large segment of the economy," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable.
Renewable energy producers also stand to be big winners in the bill, winning an extension of production tax credits that are newly convertible into cash for companies whose losses leave them unable to use the credits.
Power-equipment maker General Electric Co. lobbied for a slew of provisions in the bill and won several, including the production tax credit for renewables, $32 billion for a "smart" U.S. electrical grid for which it manufactures most components; and $300 million for rebates for consumers who buy energy efficient appliances, which GE sells.
Some green advocates didn't fare so well. The Natural Resources Defense Council had compiled a list of more than 80 environmentally friendly infrastructure and transportation projects worth about $405 billion, more than half the bill's total. The group -- a coalition with 1.2 million members -- says it is concerned about the relatively small number of these projects included.
The discord over the transportation piece of the plan is just one of many political obstacles the plan faces, despite the urgent desire of Mr. Obama and congressional Democrats to pass it by mid-February.
Republicans wasted little time pointing out items they said in no way qualified as emergency stimulus spending, such as $650 million to help television viewers convert from analog to digital. House Minority Leader John Boehner (R., Ohio) took a swipe at several items, including $400 million the plan sets aside for "national treasures," including repairs of the walls of the Tidal Basin near the Jefferson Memorial.
"What we're seeing is disappointing," said Mr. Boehner. The package, he said, "appears to be grounded in the flawed notion that we can simply borrow and spend our way back to prosperity."
But the costly initiative also may split Democrats. Many newer Democratic members of Congress hail from conservative areas and are deeply concerned about fiscal discipline.
Recognizing the political pitfalls, Democrats announced an unusual series of spending safeguards for the plan. Governors and mayors will have to personally certify that every expenditure under their jurisdiction is appropriate. Program managers will be listed online so the public can hold them accountable. A special board will monitor the plan's operation.
—Greg Hitt and Christopher Conkey contributed to this article.
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