Behind the hype: can the economic stimulus plan push the right buttons? (Washington Report).

After months of bickering and finger pointing by both the Democratic and Republican parties over the sputtering economic stimulus package, economists and business leaders alike are pondering whether any action from Washington, D.C., will provide the booster shot the ailing U.S. economy needs.

Bill Dunkelberg, chief economist for the National Federation of Independent Business, is one of the skeptics claiming the plan may be too little too late. The economist explains that it takes a period of time for Congress to notice there's a problem, then there's another lag while they're debating on setting policy, and further lag time as the legislation is implemented. "By then, the economy would likely already have rebounded," says Dunkelberg.

Ironically, President George W. Bush warned Americans several times in October that the war in Afghanistan would be a long, drawn out process, while at the same time trying to rush the stimulus package through the political system. Yet, by December, the stimulus package remained stalled in the Senate while Taliban forces were crushed.

The reason for the gridlock: The Republicans claim the economy is best stimulated by tax incentives to businesses (which ideally would lead to fewer layoffs), while Democrats, led by Senate Majority Leader Thomas Daschle (D-S.D.), contend that putting money in the pockets of the consumer and providing assistance to the unemployed would provide the needed stimulus.

GLUM AND GLUMMER

The unemployment rate hit 5.8% in-December 2001--its highest level since August 1995, according to the U.S. Bureau of Labor Statistics. By comparison, the rate was only 4.0% for December 2000. Dunkelberg expects that figure to peak at 6% to 6.5% in 2002. For African Americans, the picture was even bleaker. One out of every 10 African Americans were out of work in November, a jobless rate of 10.2%. This is three full percentage points over the 7.6% for December 2000.

Even employed middle class African American businesspeople remain dependent on sources of income that are very much tied to how the overall black population is doing financially. "We're in social services, we're in businesses that rely, to a large extent, on minority markets," says Dr. Cecilia Conrad, associate professor of economics at Pomona College in Claremont, California. "So our well-being cannot really be independent to what's happening at the bottom."

Conrad thinks the Democratic plan has the most promise. "If you really want to stimulate the economy, you need to direct the extra income and tax savings to people who are going to have the highest margin of propensity to consume, and that's people at the lower end of the income brackets because they're going to spend it," she says. "The middle income is likely to spend some of it, too, but the upper-income bracket is likely to put it away and it's not going to have the same multiplier effect."

Rep. William J. Jefferson (D-La.), a member of the Congressional Black Caucus, says the plan is just too costly, citing an approximate $200 billion price tag. "How can we stimulate the economy or help employees by giving a huge check to companies that cost the tax payers tremendous money. [This package also] disturbs the Social Security and Medicare programs, and other things that ordinary people depend on in the name of having some ultimate trickle-down effect somewhere down the road that no one's sure of."

BIG TICKET ITEM

The package comes with a price tag, perhaps a hefty one once the bill comes in from military action in Afghanistan--costing the United States some $1 billion to $2.2 billion in its first two months alone, according to The Center for Strategic and Budgetary Assessments, a nonpartisan research group. "The so-called surplus is gone and, yes, it could end up putting us a little more into a deficit," according to Conrad. "From the point of fiscal policy, this is the time for deficit spending. The idea is that you should do deficit spending during recessions and run surpluses during periods of economic growth."

Some business leaders are also skeptical of the plan. "You have to put the stimulus out to where it's going to be reinvested [into the economy] and put money into the hands of those who are going to spend it," says William G. Mays, president and CEO of Mays Chemical Co. Inc. in Indianapolis (No. 18 on the 2001 BE INDUSTRIAL/SERVICE 100 list with $172 million in sales). "It's like the [Ronald] Reagan philosophy: a rising tide lifts all ships. Well, that's fine if you have a boat in the water."

A SNOWBALL'S CHANCE?

The grim outlook for the package is where both parties agree. "I think it looks very dim right now," says Rep. J.C. Watts Jr. (R-Okla.), the chairman of the House Republican Conference. "And I'm saddened by that considering we lost about 700,000 jobs in the last two-and-a-half months."

The sad fact is that following September 11, there was an overwhelming sense of patriotism where Americans stood behind their elected officials. Washington, D.C., with its public support, could have run with the ball and accomplished whatever needed doing, serving their constituents. Instead, they fumbled while time was running out. This is the 10th recession in the United States since the end of World War II. Each has lasted an average of 11 months, according to the National Bureau of Economic Research in Cambridge, Massachusetts. If this recession--which economists say began in March 2001--follows that pattern, simple mathematics shows that any aid coming out of Washington, D.C., could be a day late and a dollar short.

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Stimulus Plan Highlights *

INDIVIDUAL PROVISIONS

* Provide $300 (single), $500 (head of household), or $600 (couples) tax rebates to individuals who filed U.S. tax returns in 2000, but did not qualify for a full rebate check last summer.

* Reduces current 27.5% tax rate to 25%, effective January 1, 2002.

* Provides up to 13 weeks of extended benefits available in any state for those who became unemployed after March 15, 2001 (approximate start of recession) and who exhaust their regular benefits.

BUSINESS TAX PROVISIONS

* Allows a taxpayer to claim an additional first-year depreciation deduction equal to 30% of the adjusted basis of qualifying property.

* Increases small-business expensing from $24,000 to $35,000. In addition, the beginning of the phase-out threshold increases from $200,000 to $325,000.

* Repeals the depreciation preference under the Alternative Minimum Tax and the 90% limitations on use of foreign tax credits and net operating losses. Effective for taxable years beginning after December 31, 2001.

* AS OF DECEMBER 21, 2001