Order Code RL34349
Economic Stimulus Proposals for 2008:
An Analysis
February 1, 2008
Jane G. Gravelle, Thomas L. Hungerford, Marc Labonte,
and N. Eric Weiss
Government and Finance Division
Julie M. Whittaker
Domestic Social Policy Division

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Economic Stimulus Proposals for 2008: An Analysis
Summary
In response to fears of an economic downturn, legislators and the President have
proposed economic stimulus packages. After negotiations with the Administration,
the Recovery Rebates and Economic Stimulus for the American People Act of 2008
(H.R. 5140) was introduced and passed by the House on January 29. On January 30,
the Senate Committee on Finance reported the Economic Stimulus Act of 2008,
which contains provisions not included in the House bill, as well as elements that are
similar. The Senate committee bill is set for consideration on the Senate floor.
The estimated budget cost of the House bill is $145.9 billion for FY2008 and
$14.8 billion for FY2009, and $117.2 billion over 10 years. The Senate Finance
Committee bill’s estimated budget cost is $158.1 billion for FY2008 — about 8%
higher than H.R. 5140 — and $155.7 billion over 10 years. The largest provisions
in both bills (in terms of budgetary cost) are a tax rebate for individuals and business
tax provisions. Both bills contain these provisions, but differ in their details. In the
House bill, the rebate would equal up to $600 for single and $1,200 for married
households that are eligible. In the Senate committee bill, it would equal up to $500
for single and $1,000 for married households, but more households would be eligible
(including more retirees). The business tax provisions include bonus depreciation
and expensing for small businesses. The Senate committee bill also includes an
extension in unemployment compensation benefits up to 26 weeks and expiring
energy tax provisions, while the House bill includes an increase in the conforming
loan limit for mortgages from $417,000 up to $729,750 in high-cost areas.
The need for fiscal stimulus depends, by definition, on the state of the economy.
While the economy is not officially in a recession at present, there are signs that
economic activity may be slowing. Some economists are predicting a recession in
the near term based on the downturn in the housing market, its spillover into financial
markets, and the rise in energy prices. In the absence of fiscal stimulus, some
economists believe that the Fed’s recent decision to significantly reduce interest rates
and natural market adjustment would be enough to avoid recession.
Fiscal policy generally stimulates the economy through an increase in the budget
deficit. In the case of deficit-financed spending increases, the increase in total
spending is direct. In the case of deficit-financed tax cuts, the economy is stimulated
via the increase in spending by the tax cuts’ recipients. Any increase in spending as
a result of fiscal stimulus is strictly temporary — in the long run, the economy
naturally adjusts to set spending equal to output. Economists have debated which
policy proposals would be most stimulative. There is a consensus that proposals that
result in more spending, can be implemented quickly, and leave no long-term effect
on the budget deficit would increase the benefits and reduce the costs of fiscal
stimulus. That being said, there is little consensus on which policy proposals best
meet these criteria. Economists generally agree that spending proposals are
somewhat more stimulative than tax cuts since part of a tax cut will be saved by the
recipient. The most important determinant of stimulative fiscal policy’s effect on the
economy is its size. Both bills would increase the deficit by about 1% of GDP.

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Contents
The Current State of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Is Fiscal Stimulus Needed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Stimulus Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Business Tax Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Housing Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Extending Unemployment Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Senate Committee Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Comparing the Macroeconomic Effects of Various Proposals . . . . . . . . . . 16
Bang for the Buck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Timeliness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Long-term Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Should Stimulus be Targeted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
List of Tables
Table 1. Estimated Budget Cost of H.R. 5140 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Table 2. Estimated Budget Cost for the Economic Stimulus Act of 2008
as Reported by the Senate Committee on Finance . . . . . . . . . . . . . . . . . . . . . 6
Table 3. Comparative Provisions of the Rebate . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 4. Business Tax Provisions of the House and Senate Committee Plans . . . 9
Table 5. Zandi’s Estimates of the Multiplier Effect for Various Policy
Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table 6. Timing of Past Recessions and Stimulus Legislation . . . . . . . . . . . . . . 19

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Economic Stimulus Proposals for 2008:
An Analysis
Recent economic indicators suggest that economic growth is slowing and the
economy may be headed for — or already in — a recession. In response to weaker
economic growth, legislators and the Administration have proposed economic
stimulus packages. After negotiations with the Administration, the Recovery Rebates
and Economic Stimulus for the American People Act of 2008 (H.R. 5140) was
introduced by Speaker Pelosi and passed by the House on January 29. On January
30, the Senate Committee on Finance reported the Economic Stimulus Act of 2008,
which contains provisions not included in the House bill. The Senate committee bill
is set for consideration on the Senate floor. The two stimulus packages differ
somewhat, and this report briefly describes those differences. In addition, the state
of the economy, the need for a stimulus package, and the macroeconomic effects of
the proposals are discussed.
The Current State of the Economy1
The need for fiscal stimulus depends, by definition, on the state of the economy.
The U.S. economy is not officially in a recession at present, according to the National
Bureau of Economic Research (NBER), the official arbiter of the business cycle. It
defines a recession as a “significant decline in economic activity spread across the
economy, lasting more than a few months” based on a number of economic
indicators, with an emphasis on trends in employment and income.2 According to the
latest available data, neither employment nor income is currently experiencing a
lasting or significant decline.3 But because a recession is defined as a lasting decline,
the NBER typically does not declare a recession until it is well under way. For
example, the recession that began in March 2001 was not declared by the NBER until
1 This section was prepared by Marc Labonte, Government and Finance Division.
2 National Bureau of Economic Research, The NBER’s Recession Dating Procedure,
January 7, 2008.
3 There are two major official employment series kept by the Bureau of Labor Statistics, the
Current Employment Series (known as the “payroll” series) and the Current Population
Series (known as the “household” series). The NBER, and most other economists, favor the
payroll series because it has a larger and more robust sample. According to the payroll
series, employment fell in January 2008 but increased, albeit slowly, each month in 2007.
At times the series diverge, however. In October and December 2007, the household series
diverged from the payroll series and measured a slight decline in employment. The
unemployment rate is calculated from the household series, and has risen in the second half
of 2007. If this trend were to continue, it would be consistent with a recession.

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November 2001, the same month in which the NBER later declared the recession to
have ended.
Nor are professional economic forecasters convinced that the economy is
heading toward a recession. According to the firm Blue Chip, 50 professional
forecasters predict, on average, a 38% chance of a recession in 2008.4 There are
signs that, if they were to persist, suggest the economy is slowing. After two strong
quarters, economic growth fell to 0.6% in the fourth quarter of 2007, but remained
positive. (Although negative growth is not an official prerequisite for a recession, all
historical recessions have featured it.) Nevertheless, some economists fear that the
likelihood of a recession is high because of recent developments.
After a long and unprecedented housing boom, the median house price of
existing homes fell by 1.8% in 2007 — possibly the first year of falling prices since
the Great Depression, according to the organization which compiles the data.5 And
the decline appears to be worsening over time: prices fell 6.5% in December 2007
compared to the previous December. Other housing data fell even further — existing
home sales fell by 22% in the twelve months since December 2007, and residential
investment (house building) fell by 18% in the four quarters ending in the fourth
quarter of 2007. The decline in residential investment has acted as a drag on overall
GDP growth, while the other components of GDP have grown at more healthy rates.
Many economists argued that the housing boom was not fully caused by
improvements in economic fundamentals (such as rising incomes and lower
mortgage rates), and instead represented a housing bubble — a situation where prices
were being pushed up by “irrational exuberance.”6
Most economists believe that a housing downturn alone would not be enough
to singlehandedly cause a recession.7 But in August 2007, the housing downturn
spilled over to widespread financial turmoil.8 Triggered by a dramatic decline in the
price of subprime mortgage-backed securities and collateralized debt obligations,
large losses and a decline in liquidity spread throughout the financial system. The
Federal Reserve was forced to create unusually large amounts of liquidity to keep
short-term interest rates from rising in August, and has since reduced interest rates
significantly. To date, financial markets remain volatile and new losses continue to
be announced at major financial institutions. A reduction in lending by financial
institutions in response to uncertainty or financial losses is another channel through
which the economy could enter a recession.
4 Blue Chip, Economic Indicators, vol. 33, no. 1, January 10, 2008.
5 Michael Grynbaum, “Home Prices Sank in 2007, and Buyers Hid,” New York Times,
January 25, 2008. Prices are compiled by the National Association of Realtors.
6 For more information, see CRS Report RL34244, Would a Housing Crash Cause a
Recession?, by Marc Labonte.
7 See, for example, Frederic Mishkin, “Housing and the Monetary Transmission
Mechanism,” working paper presented at the Federal Reserve Bank of Kansas City
symposium, August 2007.
8 See CRS Report RL34182, Financial Crisis? The Liquidity Crunch of August 2007, by
Darryl Getter et al.

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At the same time as the economy and financial sector has been grappling with
the housing downturn, energy prices have risen significantly, from $48 per barrel in
January 2007 to $88 per barrel in the first three weeks of January 2008. Most
recessions since World War II, including the most recent, have been preceded by an
increase in energy prices.9 Energy prices have gone up almost continuously in the
current expansion, however, without causing a recession so far, which may point to
the relative decline in importance of energy consumption to production. While a
housing downturn or an energy shock might not be enough to cause a recession in
isolation, the combination could be sufficient.
Is Fiscal Stimulus Needed?
The economy naturally experiences a boom and bust pattern that is called the
business cycle. A recession can be characterized as a situation where total spending
in the economy (aggregate demand) is too low to match the economy’s potential
output (aggregate supply). As a result, some of the economy’s labor and capital
resources lay idle, causing unemployment and a low capacity utilization rate,
respectively. Recessions are short-term in nature — eventually, markets adjust and
bring spending and output back in line, even in the absence of policy intervention.10

Policymakers may prefer to use stimulative policy to attempt to hasten that
adjustment process, in order to avoid the detrimental effects of cyclical
unemployment. By definition, a stimulus proposal can be judged by its effectiveness
at boosting total spending in the economy. Total spending includes personal
consumption, business investment in plant and equipment, residential investment, net
exports (exports less imports), and government spending. Effective stimulus could
boost spending in any of these categories.
Fiscal stimulus can take the form of higher government spending (direct
spending or transfer payments) or tax reductions, but generally it can boost spending
only through a larger budget deficit. A deficit-financed increase in government
spending directly boosts spending by borrowing to finance higher government
spending or transfer payments to households. A deficit-financed tax cut indirectly
boosts spending if the recipient uses the tax cut to increase his spending. If an
increase in spending or a tax cut is financed through a decrease in other spending or
increase in other taxes, the economy would not be stimulated since the deficit-
increasing and deficit-decreasing provisions would cancel each other out.
Since total spending can be boosted only temporarily, stimulus has no long-term
benefits, and may have long-term costs. Most notably, the increase in the budget
deficit “crowds out” private investment spending because both must be financed out
of the same finite pool of national saving, with the greater demand for saving pushing
9 For more information, see CRS Report RL31608, The Effects of Oil Shocks on the
Economy, by Marc Labonte.
10 For more information, see CRS Report RL34072, Economic Growth and the Business
Cycle, by Marc Labonte.

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up interest rates.11 To the extent that private investment is crowded out by a larger
deficit, it would reduce the future size of the economy since the economy would
operate with a smaller capital stock in the long run. In recent years, the U.S.
economy has become highly dependent on foreign capital to finance business
investment and budget deficits.12 Since foreign capital can come to the United States
only in the form of a trade deficit, a higher budget deficit could result in a higher
trade deficit, in which case the higher trade deficit could dissipated the boost in
spending. Indeed, conventional economic theory predicts that fiscal policy has no
stimulative effect in an economy with perfectly mobile capital flows.13 Some
economists argue that these costs outweigh the benefits of fiscal stimulus.
The most important determinant of a stimulus’ macroeconomic effect is its size.
Both the House and Senate committee stimulus packages would increase the budget
deficit by about 1% of gross domestic product (GDP). In a healthy year, GDP grows
about 3%. In the moderate recessions that the U.S. experienced in 1990-1991 and
2001, GDP contracted in some quarters by 0.5% to 3%. (The U.S. economy has not
experienced contraction in a full calendar year since 1991.) Thus, a swing from
expansion to recession would result in a change in GDP growth equal to at least 3.5
percentage points. A stimulus package of 1% of GDP could be expected to increase
total spending by about 1%.14 To the extent that spending begets new spending, there
could be a multiplier effect that makes the total increase in spending larger than the
increase in the deficit. Offsetting the multiplier effect, the increase in spending could
be neutralized if it results in crowding out of investment spending, a larger trade
deficit, or higher inflation. The extent to which the increase in spending would be
offset by these three factors depends on how quickly the economy is growing at the
time of the stimulus — an increase in the budget deficit would lead to less of an
increase in spending if the economy were growing faster.
Since the economy is not currently in a recession to the best of our knowledge,
it is uncertain whether stimulus is needed. Economic forecasts are notoriously
inaccurate due to the highly complex nature of the economy. If the economy enters
a recession, then fiscal stimulus could mitigate the decline in GDP growth and bring
idle labor and capital resources back into use. If the economy experiences solid
growth, then a boost in spending could be largely inflationary — since there would
be no idle resources to bring back into production when spending is boosted, the
boost would instead bid up the prices of those resources, eventually causing all prices
to rise.
11 Crowding out is likely to be less of a concern if the economy enters a recession since
recessions are typically characterized by falling business investment.
12 If foreign borrowing prevents crowding out, the future size of the economy will not
decrease but capital income will accrue to foreigners instead of Americans.
13 For more information, see CRS Report RS21409, The Budget Deficit and the Trade
Deficit: What Is Their Relationship?, by Marc Labonte and Gail E. Makinen.
14 See, for example, “Options for Responding to Short-term Economic Weakness,”
Testimony of CBO Director Peter Orszag before the Committee on Finance, January 22,
2008.

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In judging the need for a stimulus package, policymakers might also consider
that stimulus is already being delivered from two other sources. First, the federal
budget has automatic stabilizers that cause the budget deficit to automatically
increase (and thereby stimulate the economy) during a downturn in the absence of
policy changes. When the economy slows, entitlement spending on programs such
as unemployment compensation benefits automatically increases as program
participation rates rise and the growth in tax revenues automatically declines as the
recession causes the growth in taxable income to decline. The Congressional Budget
Office projects that under current policy, which excludes a stimulus package, the
budget deficit will increase by $56 billion in 2008 compared to 2007. If
supplemental military spending to maintain current troop levels overseas and an
alternative minimum tax patch are enacted, and expiring tax provisions are extended,
CBO estimates the 2008 deficit could increase by $98 billion in total compared to
2007, in the absence of stimulus legislation.
Second, the Federal Reserve has already delivered a large monetary stimulus.
As of the end of January 2008, the Fed had already reduced overnight interest rates
to 3% from 5.25% in September. Lower interest rates stimulate the economy by
increasing the demand for interest-sensitive spending, which includes investment
spending, residential housing, and consumer durables. In addition, lower interest
rates would stimulate the economy by reducing the value of the dollar, all else equal,
which would lead to higher exports and lower imports.15
Presumably, the Federal Reserve has chosen a monetary policy that it believes
will best avoid a recession in the absence of fiscal stimulus. If it has chosen that
policy correctly, an argument can be made that fiscal stimulus is unnecessary since
the economy is already receiving the correct boost in spending through lower interest
rates. In this light, fiscal policy would be useful only if monetary policy is unable to
adequately boost spending — either because the Fed has chosen an incorrect policy
or because the Fed cannot boost spending enough through lower interest rates to
avoid a recession.16
Stimulus Proposals
Both the House and Senate Finance Committee versions of an economic
stimulus package are briefly described below. The House version is the Recovery
Rebate and Economic Stimulus for the American People Act of 2008 (H.R. 5140).
The estimated budget cost of H.R. 5140 is $145.9 billion for FY2008 and $14.8
billion for FY2009 (see Table 1). The 10-year cost is estimated to be $117.2 billion.
15 For more information, see CRS Report RL30354, Monetary Policy and the Federal
Reserve, by Marc Labonte and Gail E. Makinen.
16 Fed Chairman Ben Bernanke may have hinted at the latter case when he testified that
“fiscal action could be helpful in principle, as fiscal and monetary stimulus together may
provide broader support for the economy than monetary policy actions alone.” Quoted in
Ben Bernanke, “The Economic Outlook,” testimony before the House Committee on the
Budget, January 17, 2008.

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Table 1. Estimated Budget Cost of H.R. 5140
(billions of dollars)
Provision
FY2008
FY2009
FY2008-2018
Rebates for Individuals
-101.1
-8.6
-109.7
Increase Sec. 179 Expensing and
-0.9
-0.6
-0.1
Phaseout Amounts for 2008
50% Bonus Depreciation
-43.9
-5.6
-7.4
Total
-145.9
-14.8
-117.2
Source: Joint Committee on Taxation, JCX-6-08, Jan. 28, 2008.
The bill reported by the Senate Committee on Finance, the Economic Stimulus
Act of 2008, includes additional provisions, such as energy provisions and extended
unemployment insurance benefits, but excludes changes to the conforming loan
limits for mortgages. There are some differences in the provisions that both bills
share as well, which will be discussed below. Its estimated budget cost for FY2008
is $158.1 billion — about 8% higher than H.R. 5140 (see Table 2). The 10-year
budget cost is estimated to be $155.7 billion.
Table 2. Estimated Budget Cost for the Economic Stimulus Act
of 2008 as Reported by the Senate Committee on Finance
(billions of dollars)
Provision
FY2008
FY2009
FY2008-2018
Stimulus Rebate
-115.1
-11.2
-126.4
Business Stimulus Incentives
-32.3
-28.9
-11.9
Extensions of Energy Provisions
-0.7
-1.1
-5.7
Expansion of Qualified
—
-0.1
-1.7
Mortgage Bonds
Extension of Unemployment
-10.1
-4.4
-9.9
Insurance
Total
-158.1
-45.7
-155.7
Source: Joint Committee on Taxation, JCX-13-08, Jan. 30, 2008.
Tax Rebates17
The centerpiece of both the House bill (H.R. 5140) and the Senate committee
proposal is the tax rebate for individuals. Unlike the 2001 rebate, both rebates have
elements of refundability, although the Senate committee proposal’s refundability is
17 This section was prepared by Jane Gravelle, Government and Finance Division.

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greater than in the House proposal. The House proposal, H.R. 5140, would provide
$109.7 billion in rebates, while the Senate committee proposal would provide $126.3
billion.18 The rebate is technically a credit for 2008, but payments would be mailed
in 2008 based on 2007 returns. If taxpayers qualify for a higher credit based on their
2008 circumstances, they could claim the excess on their 2008 returns.
There are five elements of the rebate proposals that are outlined in Table 3. The
first is the basic nature of the rebate. The House proposal effectively suspends part
of the 10% income tax bracket, allowing a reduction in tax liability of 10% of the
first $6,000 of taxable income for single individuals and 10% of the first $12,000 of
taxable income for married couples. Absent any other provisions, the benefit would
increase gradually until a maximum benefit was reached at $600 for single
individuals and $1,200 for married couples. The Senate committee plan allows a flat
rebate of $500 for single individuals and $1,000 for couples.
Table 3. Comparative Provisions of the Rebate
Provision
House Bill
Senate Committee Bill
General Rebate
10% of the first $6,000 of taxable
Flat rebate of $500,
Proposal
income ($12,000 for couples), to
$1,000 for couples
extent of tax liability (maximum
$600/$1,200)
Refundability
$300 rebate ($600 for couples)
Full rebate allowed if earned
Provisions
available if earned income is at
income plus Social Security
least $3,000
benefits are at least $3,000 or
taxable income is at least $1.
High Income
Phased out at 5% of income over
Phased out at 5% of income over
Phase-out
$75,000 for single individuals,
$150,000 for single individuals,
Provisions
$150,000 for couples
$300,000 for couples.
Child Provisions
$300 per qualifying child if
$300 per qualifying child if
eligible for any other rebate
eligible for any other rebate
Other Features
None
Expands rebates to veterans
receiving disability; disallows the
rebate to illegal immigrants.
Source: CRS.
The second element is the basic refundability feature, which extends benefits to
lower income households without tax liability. In the House bill, individuals without
tax liability but with earnings of at least $3,000 can receive a minimum rebate of
$300 for singles and $600 for married couples. (Households with earnings under
$3,000 would not receive a rebate.) In the Senate committee proposal, the full flat
amount can be received for households with at least $3,000 in combined earnings and
Social Security benefits. This inclusion of Social Security benefits would extend the
rebate to a large group of retired individuals who do not have taxable income.
18 Joint Committee on Taxation, See JCX-6-08 and JCX-9-08,[http://www.house.gov/jct/].

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The third element is the treatment of high income taxpayers. In both bills, the
benefit is phased out at higher incomes; the phaseout points are higher in the Senate
committee proposal.
The fourth element is the child rebate, which in both plans is set at $300 per
child and allowed if a basic or refundable rebate is received.
The fifth element (present only in the Senate committee proposal) limits and
expands the scope of the rebates by extending them to veterans on disability and
denying them to illegal immigrants by requiring the taxpayer identification number
to be a social security number.
Compared to the experience with a rebate in 2001, the proposed rebates are
more favorable to lower income individuals because of their refundability provisions.
For a non-refundable credit, about 37% of taxpayers would not receive a credit
because of lower incomes; in the House bill, 20% would not receive a credit and in
the Senate committee proposal, 6.5% would not.19 The increase in coverage in the
Senate committee proposal is due to coverage of the elderly. The House bill is more
progressive (i.e., relatively more favorable to lower income households) than a non-
refundable rebate, and the Senate committee bill is more progressive than the House
bill (except at the top of the income distribution).
Although some rebates in the past appeared to be relatively ineffective in
increasing spending, there is some evidence the 2001 rebate was spent.20 In general,
economic analysis suggests that benefits that go more heavily to low income
individuals are likely to be more effective, per dollar of payment, than those with
smaller benefits because lower income households are more likely to spend the
rebate, and spending is necessary to produce a stimulus. The extension of rebates to
those with Social Security payments could be quite complex administratively, since
it would require filing and processing up to an additional 18 million tax returns.21
Business Tax Incentives22
The House bill includes two business provisions. The first is bonus
depreciation, allowing 50% of investment with a life of less than 20 years (which
applies mostly to equipment) to be deducted when purchased. The second addresses
a provision that allows small businesses to deduct all equipment investment when
purchased, by increasing the ceiling on eligible equipment and phasing out the
benefit more slowly. The Senate committee proposal has these same provisions,
19 See CRS Report RL34341, Tax Rebate Refundability: Issues and Effects, by Jane G.
Gravelle.
20 See CRS Report RS22970, Tax Cuts for Short Run Economic Stimulus: Recent
Experiences, by Jane G. Gravelle.
21 According to the Tax Policy Center, 18 million households over the age of 65 would
receive no rebate under the House bill. See Tax Policy Center, Table T08-0030, at
[http://www.taxpolicycenter.org/numbers/displayatab.cfm?Docid=1742&DocTypeID=4].
22 This section was prepared by Jane Gravelle, Government and Finance Division.

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although it modifies bonus depreciation by allowing a deduction over two years
instead of one. It also adds a provision that would allow companies to increase the
period of time in the past that they can use to offset current net operating losses
(NOLs) against past positive taxable income from two years to five, for losses
generated in 2006 or 2007. The Senate committee proposal would allow businesses
to use only one of the three provisions. The Senate committee proposal also includes
the extension of some energy provisions that largely relate to businesses. These
provisions are compared in Table 4.
Table 4. Business Tax Provisions of the House and Senate
Committee Plans
House Bill (H.R. 5140)
Senate Committee Bill
Bonus
For 2008, allows 50% of eligible
For 2008, elect to allow 50% of
Depreciation
investment (generally equipment) to
investment to be deducted equally
be deducted when incurred
over the first two years
Small Business
For 2008, increases the amount of
For 2008, elect to increase the
Expensing
eligible investment (generally
amount of eligible investment
equipment) expensing from
(generally equipment) expensing
$128,000 to $250,000; begin
from $128,000 to $250,000; begin
phaseout at $800,000 instead of
phaseout out at $800,000 instead of
$510,000.
$510,000.
Net Operating
None
Elect to increase NOL carryback
Loss (NOL)
from two years to five years for
Carryback
losses generated from 2006 to 2008;
and suspends provision that NOL
cannot exceed 90% of alternative
minimum taxable income.
Other Features
None
Taxpayer may elect only one of the
three business benefits above;
extends through 2009 of expired or
expiring energy incentives;
expands tax exempt mortgage and
rental housing bonds.
Source: CRS.
The bonus depreciation provisions are the most costly of the business
provisions, amounting to $43.9 billion in FY2008 and $5.4 billion in FY2009 for the
House bill and $16.4 billion in FY2008 and $20.2 billion in FY2009 for the Senate
committee proposal. (Apparently the election provision significantly reduces the cost
of bonus depreciation in the first two years.) As with all of the provisions, which
largely involve timing, revenue is gained in future years as regular depreciation
deductions fall. Over 10 years, the cost is $7.4 billion in the House bill and $6.7
billion in the Senate committee proposal.23
23 Revenue estimates are from the Joint Committee on Taxation, See JCX-6-08 and JCX-9-
08,[http://www.house.gov/jct/]

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The small business expensing provision, in both plans, costs $0.9 billion in
FY2008 and $0.6 billion in FY2009, with the 10-year cost $0.1 billion. The net
operating loss (NOL) provision in the Senate committee proposal loses $15.4 billion
in FY2008, and $8.1 billion in FY2009, and then gains revenue, with the ten-year
cost $5.1 billion.
Because these benefits arise from timing, neither the initial cost nor the 10-year
cost provide a good reflection of the value to the firm. For the benefit of bonus
depreciation to the firm, the discounted values (using an 8% nominal interest rate)
would be about $18 billion for the House bill and about $14 billion for the Senate
committee proposal.
Overall, it is unlikely that these provisions would provide significant short-term
stimulus. Investment incentives are attractive, if they work, because increasing
investment does not trade off short term stimulus benefits for a reduction in capital
formation, as do provisions stimulating consumption. Nevertheless, most evidence
does not suggest these provisions work very well to induce short-term spending.24
This lack of effectiveness may occur because of planning lags or because stimulus
is generally provided during economic slowdowns when excess capacity may already
exist.
Of business tax provisions, investment subsidies are more effective than rate
cuts, but there is little evidence to support much stimulus effect. Temporary bonus
depreciation is likely to be most effective in stimulating investment, more effective
than a much costlier permanent investment incentive because it encourages the
speed-up of investment. Although there is some dispute, most evidence on bonus
depreciation enacted in 2002 nevertheless suggests that it had little effect in
stimulating investment and that even if the effects were pronounced, the benefit was
too small to have an appreciable effect on the economy.
The likelihood of the remaining provisions having much of an incentive effect
is even smaller. Firms may, for example, benefit from the small business expensing,
but it actually discourages investment in the (expanded) phase out range. The NOL
provision, since it largely relates to events that have occurred in the past and
therefore the effect is only a cash flow effect, is unlikely to have much incentive
effect.
The energy provisions provide an extension through 2009 of provisions that
expired at the end of 2007 or will expire at the end of 2008.25 Their overall cost is
24 See CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, and CRS
Report RS22970, Tax Cuts for Short Run Economic Stimulus: Recent Experiences, by Jane
G. Gravelle.
25 The provisions include the credit for energy efficient appliances, the credit for certain
non-business energy property, the suspension of the net income limit for marginal oil and
gas properties, the 30% credit for residential investments in solar and fuel cells, the placed-
in-service date for the tax credit for electricity produced from renewable resources, the
credit for construction of energy efficient homes, the section 48 business credit, clean
(continued...)

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CRS-11
$5.7 billion and they are unlikely to have a stimulative effect of importance, not only
because of their size and because investment incentives are unlikely to be effective,
but also because market participants may already be acting under the expectation that
they will be extended in any case. Finally the Senate committee proposal provides
an extension of tax exempt bonds for housing, that costs $1.7 billion and, similarly,
would be unlikely to provide a significant short-term stimulus.
Housing Provisions26
The House bill would allow the housing government-sponsored enterprises
(GSEs), Fannie Mae and Freddie Mac, to purchase qualifying mortgages originated
between July 1, 2007, and December 31, 2008, up to a value of $729,750 in high cost
areas. This would be an increase above the current conforming loan limit of
$417,000. The limit for any area would be the greater of (1) the 2008 conforming
loan limit ($417,000) or (2) 125% of the area median house price, and no higher than
(3) 175% of the 2008 conforming loan limit ($729,750, which is 175% of $417,000).
It would grant the Federal Housing Administration (FHA) temporary authority
to insure mortgages in high cost areas up to this $729,750 limit. The authority would
expire December 31, 2008. Currently the FHA limit ranges from $200,160 to
$362,790 in high-cost areas.27
The Secretary of the Department of Housing and Urban Development (HUD)
would be required to publish the increased GSE and FHA limits. None of these
provisions were included in the bill reported by the Senate Finance Committee.
Many of those supporting the increases believe they would provide a needed
stimulus to housing and mortgage markets.28
The immediate impact of the changes affecting Fannie Mae and Freddie Mac,
however, is unclear. The Office of Federal Housing Enterprise Oversight (OFHEO),
an independent office within HUD, which oversees the safety and soundness of the
GSEs, has announced that it is “disappointed” that increasing the limit was not part
of general regulatory reform, and that the GSEs should subject the higher priced
mortgages to rigorous new product development, risk management, and capital
reserves.29 This suggests that HUD might require the GSEs to submit their plan to
25 (...continued)
renewable energy bonds, and the energy efficient commercial property deduction.
26 This section was prepared by Eric Weiss, Government and Finance Division.
2 7 F H A l i m i t s a r e a v a i l a b l e f r o m H U D ' s w e b s i t e a t
[https://entp.hud.gov/idapp/html/hicost1.cfm].
28 James R. Haggerty and Damian Paletta, “Details Lacking on Mortgage-Relief Plan,” Wall
Street Journal, January 26, 2008, p. A6.
29 James Lockhart, Statement of OFHEO Director James B. Lockhart on Conforming Loan
L i m i t I n c r e a s e , J a n u a r y 2 4 , 2 0 0 8 , a v a i l a b l e a t
[http://www.ofheo.gov/NewsRoom_Print.aspx?ID=410].

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CRS-12
purchase the larger mortgages for regulatory review.30 Unlike the GSEs, FHA (part
of HUD) is not under independent regulatory authority.
Given these delays and the limited lives of the programs, it is not clear how
much use the GSEs or FHA would make of their temporary authority. As
stockholder-owned companies, the GSEs would balance their fiduciary responsibility
to earn profits with the requirements in their Congressional charters to assist housing
markets. FHA would probably consider the risk to the financial soundness of their
insurance fund against temporary assistance to parts of the housing market.
Other factors tending to limit the impact of the increased mortgage limits are as
follows:
! Existing loan-to-value limits would continue to apply. This would
prevent homeowners who owe more on a house than its appraised
value from participating in the program.
! Existing credit worthiness and debt-to-income requirements would
apply. This would prevent anyone not current on their mortgage
from refinancing.
! The GSEs currently are close to the maximum retained portfolios
that they can have without raising additional capital. The GSEs
could, however, follow the suggestion in H.R. 5140 to package these
mortgages, add their guarantees, and sell mortgage-backed
securities (MBS) to large investors.
These housing-related provisions of H.R. 5140 would narrow or eliminate the
spread between loans above today’s loan limit (but under proposed limits) and
conforming loans already eligible for purchase. Recently, this spread has been in the
range of 0.90% to 1.10%, as compared to a “normal” spread of approximately 0.20%.
The provisions, and subsequent reduction in the spread, would
! Help homebuyers with good credit obtain lower interest rates on
loans above the current loan limits and below the temporarily higher
ones. The monthly payments on a 30-year fixed-rate $600,000
mortgage could fall from $3,824 to $3,377, saving $447 per month.31
FHA’s guidelines state that mortgage payments, insurance, and
taxes should not exceed 29% of monthly income. According to the
guidelines, a combined monthly housing expense of $3,377 would
require a minimum annual household income of $140,000;
30 The Secretary of the Department of Housing and Urban Development has new program
approval authority. See 12 U.S.C. 4542.
31 Interest rates are based on mortgage rates reported by Bankrate.Com at
[http://www.bankrate.com/brm/graphs/graph_trend.asp?tf=91&ct=Line&prods=1,325&g
s=275,250&st=zz&c3d=False&web=brm&cc=1&prodtype=M&bgcolor=&topgap=&bot
tomgap=&rightgap=&leftgap=&seriescolor=].

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CRS-13
! Primarily help home buyers in areas with high home prices such as
California, New York City and its suburbs, the Boston area, the
Seattle area, and the Washington, D.C. area. Most other parts of the
nation have home prices that would not cause their ceiling to
increase;
! The provision raising the limit on home prices to 125% of the area
median house price would raise the loan ceiling in areas with a
median house price of more than $336,000. For example, in
Barnstable, MA the median existing home price in the third quarter
of 2007 was $400,600. A mortgage there presently is capped at
$417,000, but would increase to $500,750 (125% of $400,600 is
$500,750);
! Likely have little impact in areas and houses where the current
conforming loan limit would still apply;
! Not count mortgages purchased by the GSEs as a result of the higher
loan limit for the purpose of low- and moderate-income housing
goals and underserved areas goals. HUD establishes numeric goals
based on the Housing and Community Development Act of 1992;32
and
! Help FHA compete against private sector lenders and possibly open
homeownership to borrowers who, for one reason or another, could
not qualify for a conforming mortgage to purchase a more expensive
home.33
Extending Unemployment Benefits34
Originally, the intent of the Unemployment Compensation (UC) program was,
among other things, to help counter economic fluctuations such as recessions.35 This
intent is reflected in the current UC program’s funding and benefit structure. UC is
financed by federal payroll taxes under the Federal Unemployment Tax Act (FUTA)
and by state payroll taxes under the State Unemployment Tax Acts (SUTA). When
the economy grows, UC program revenue rises through increased tax revenues, while
UC program spending falls as fewer workers are unemployed. The effect of
collecting more taxes than are spent is to dampen demand in the economy. This also
creates a surplus of funds or a “cushion” of available funds for the UC program to
32 12 U.S.C. 4562-4564 and 4566.
33 For more information on FHA, see CRS Report RS22662, H.R. 1852 and Revisiting the
FHA Premium Pricing Structure: Proposed Legislation in the 110th Congress, by Darryl
E. Getter and CRS Report RS20530, FHA Loan Insurance Program: An Overview, by Bruce
E. Foote and Meredith Peterson.
34 This section was prepared by Julie M. Whittaker, Domestic Social Policy Division.
35 See, for example, President Franklin Roosevelt’s remarks at the signing of the Social
Security Act [http://www.ssa.gov/history/fdrstmts.html#signing].

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CRS-14
draw upon during a recession. In a recession, UC tax revenue falls and UC program
spending rises as more workers lose their jobs and receive UC benefits. The
increased amount of UC payments to unemployed workers dampens the economic
effect of earnings losses by injecting additional funds into the economy.36
The limited duration of UC benefits (generally no more than 26 weeks) results
in some unemployed individuals exhausting their UC benefits before finding work
or voluntarily leaving the labor force for other activities such as retirement, disability,
family care, or education. The Extended Benefit (EB) program, established by P.L.
91-373 (26 U.S.C. 3304, note), may extend UC benefits at the state level if certain
economic situations exist within the state. Although the EB program is not currently
active in any state, it — like the UC program — is permanently authorized. The EB
program is triggered when a state’s insured unemployment rate (IUR)37 or total
unemployment rate (TUR)38 reaches certain levels. States must pay up to 13 weeks
of EB if the IUR for the previous 13 weeks is at least 5% and is 120% of the average
of the rates for the same 13-week period in each of the 2 previous years. There are
two other optional thresholds that states may choose. (They may choose one, two,
or none.) If the state has chosen the option, it would provide the following:
! Option 1: an additional 13 weeks of benefits if the state’s IUR is at
least 6%, regardless of previous years’ averages.
! Option 2: an additional 13 weeks of benefits if the state’s TUR is at
least 6.5% and is at least 110% of the state’s average TUR for the
same 13-weeks in either of the previous two years; an additional 20
weeks of benefits if the TUR is at least 8%.
During some economic recessions, Congress has created federal temporary
programs of extended unemployment compensation. Congress acted seven times —
in 1958, 1961, 1971, 1974, 1982, 1991, and 2002 — to establish these temporary
programs of extended UC benefits. These programs extended the time an individual
might claim UC benefits (ranging from an additional 6 to 33 weeks) and had
expiration dates. Some extensions took into account state economic conditions;
many temporary programs considered the state’s TUR and/or the state’s insured
unemployment rate (IUR).
36 For a detailed examination of how the federal government has extended UC benefits
during recessions see CRS Report RL34340, Extending Unemployment Compensation
Benefits During Recessions, by Julie M. Whittaker.
37 The IUR is substantially different than the TUR because it excludes several important
groups: self-employed workers, unpaid family workers, workers in certain not-for-profit
organizations, and several other, primarily seasonal, categories of workers. In addition to
those unemployed workers whose last jobs were in the excluded employment category, the
insured unemployed rate excludes the following: those who have exhausted their UC
benefits; new entrants or reentrants to the labor force; disqualified workers whose
unemployment is considered to have resulted from their own actions rather than from
economic conditions; and, eligible unemployed persons who do not file for benefits.
38 The TUR is essentially a weekly version of the unemployment rate published by the
Bureau of Labor Statistics. That is, the ratio of the total number of unemployed persons
divided by the total number of employed and unemployed persons.

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CRS-15
Recently, congressional and popular debate has examined the relative efficacy
of the expansion of UC benefits and duration compared to other potential economic
stimuli. In his January 22, 2008 congressional testimony, the Director of the
Congressional Budget Office (CBO) stated that increasing the value or duration of
UC benefits may be one of the more effective economic stimulus plans.39 This is
because many of the unemployed are severely cash constrained and would be
expected to rapidly spend any increase in benefits that they may receive.40
Others point out that increasing either the value or length of UC benefits may,
however, discourage recipients from searching for work or from accepting less
desirable jobs.41 A rationale for making an extension in UC benefits only temporary
is to mitigate disincentives to work, since the extension would expire once the
economy improves and cyclical unemployment declines.
A vigorous debate on how to determine when the federal government should
extend unemployment benefits has been active for decades. Generally, this debate
has examined the efficacy of using the IUR or TUR as triggers for extending benefits.
The debate also has examined whether the intervention should be at a national or
state level. Recently, serious consideration of alternative labor market measures has
become increasingly common. In particular, the increase in the number of
unemployed from the previous year has emerged in several proposals as a new trigger
for a nation-wide extension in unemployment benefits.
Senate Committee Proposal. The bill, as passed by the Senate Finance
Committee on January 30, 2008, would create a new temporary extension of UC that
would entitle certain unemployed individuals to unemployment benefits that are not
available under current law. (The House bill contained no provisions relating to
unemployment benefits.) Individuals who had exhausted all rights to regular UC
benefits under the state or federal law with respect to a benefit year (excluding any
benefit year that ended before February 1, 2007) would be eligible for these
additional benefits. The amount of the benefit would be the equivalent of the
individual’s weekly regular UC benefit (including any dependents’ allowances). The
temporary extension would be financed 100% by the federal government.
39 See CBO Testimony of Peter Orszag on Options for Responding to Short-Term Economic
Weakness before the Committee on Finance United States Senate on January 22, 2008,
[http://www.cbo.gov/ftpdocs/89xx/doc8932/01-22-TestimonyEconStimulus.pdf].
40 For another paper that takes this position see the following: Elmendorf, Douglas W. and
Jason Furman, If, When, How: A Primer on Fiscal Stimulus, January 2008,
[http://www.brookings.edu/papers/2008/0110_fiscal_stimulus_elmendorf_furman.aspx].
41 For example, Shrek, James and Patrick Tyrell, Unemployment Insurance Does Not
S t i m u l a t e t h e E c o n o m y , W e b m e m o # 1 7 7 7 , J a n u a r y 2 0 0 8 ,
[http://www.heritage.org/Research/Economy/wm1777.cfm#_ftn1]. Martin Feldstein in
testimony before the Senate Committee on Finance on January 24, 2008 stated that “(w)hile
raising unemployment benefits or extending the duration of benefits beyond weeks would
help some individuals ... it would also create undesirable incentives for individuals to delay
returning to work. That would lower earnings and total spending.”
[http://www.senate.gov/~finance/hearings/testimony/2008test/012408mftest.pdf]

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CRS-16
The number of weeks an individual would be eligible for these temporary
extended UC benefits would be the lesser of 50% of the total regular UC eligibility
or 13 weeks. Under a special rule, if the state is in an EB period (which has a special
definition for purposes of this temporary extension), the amount of temporary
extended UC benefits would be augmented by an additional amount that is equivalent
to the temporary UC benefit. Thus, in those "high-unemployment" states where the
EB program was triggered, temporary benefits of up to 26 weeks would be possible.42
As of this writing, both Michigan and Puerto Rico would qualify for the additional
“high-unemployment” benefits.
Governors of the states would be able to pay the temporary extended UC benefit
in lieu of the Extended Benefit (EB) payment (if state law permits). Thus, once the
regular UC benefit was exhausted, a state would be able to opt for the individual to
receive the temporary extended UC benefit (100% federal funding) rather than
receiving the EB benefit (50% federal funding and 50% state funding).
The program would terminate on December 31, 2008. Unemployed individuals
who had qualified for the temporary extended UC benefit or had qualified for the
additional “high-unemployment” provision would continue to receive payments for
the number of weeks they were deemed eligible. However, if the unemployed
individual has not exhausted the first temporary extension of UC benefits by
December 31, 2008, regardless of state economic conditions, the individual would
not be eligible for an additional “high-unemployment” extension of the temporary
UC benefit. If an individual exhausts his or her regular UC benefits after December
31, 2008, the individual would not be eligible for any temporary extended UC
benefit. No such benefits would be payable for any week beginning after March 31,
2009.
Comparing the Macroeconomic
Effects of Various Proposals43
The relative effectiveness of different proposals in stimulating the economy has
been evaluated along a number of lines that will be discussed in this section.44
42 The bill would temporarily change the definition of an EB period only for the purposes
of the bill. Regardless of whether a state had opted for section 203(f) of the Federal-State
Extended Unemployment Compensation Act of 1970, an EB period would be in effect for
such state in determining the level of temporary extended UC benefits in the state. The bill
would temporarily change that trigger by removing the requirement that the TUR be at least
110% of the state's average TUR for the same 13-weeks in either of the previous two years.
The bill would also change the base EB trigger described in section 203(d) only for purposes
of the bill, reducing it from an IUR of 5% to an IUR of 4%.
43 This section was prepared by Marc Labonte, Government and Finance Division.
44 For a more detailed analysis, see Congressional Budget Office, Options for Responding
to Short-Term Economic Weakness, January 2008.

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CRS-17
Bang for the Buck. In terms of first-order effects, any stimulus proposal that
is deficit financed would increase total spending in the economy.45 For second-order
effects, different proposals could get modestly more “bang for the buck” than others
if they result in more total spending. If the goal of stimulus is to maximize the boost
to total spending while minimizing the increase in the budget deficit (in order to
minimize the deleterious effects of “crowding out”), then maximum bang for the
buck would be desirable. The primary way to achieve the most bang for the buck is
by choosing policies that result in spending, not saving.46 Direct government
spending on goods and services would therefore lead to the most bang for the buck
since none of it would be saved. The largest categories of direct federal spending are
national defense, health, infrastructure, public order and safety, and natural
resources.47
Higher government transfer payments, such as extended unemployment
compensation benefits or increased food stamps, or tax cuts could theoretically be
spent or saved by their recipients.48 While there is no way to be certain how to target
a stimulus package toward recipients who would spend it, many economists have
reasoned that higher income recipients would save more than lower income recipients
since U.S. saving is highly correlated with income. For example, two-thirds of
families in the bottom 20% of the income distribution did not save at all in 2004,
whereas only one-fifth of families in the top 10% of the income distribution did not
save.49 Presumably, recipients in economic distress, such as those receiving
unemployment benefits, would be even more likely to spend a transfer or tax cut than
a typical family. As discussed previously, business tax incentives can be crafted so
that they can be claimed only in response to higher investment spending, but
businesses may be unwilling to increase their investment spending when faced with
a cyclically-induced decline in demand for their products.50
45 There may be a few proposals that would not increase spending. For example, increasing
tax incentives to save would probably not increase spending significantly. These examples
are arguably exceptions that prove the rule.
46 Policies that result in more bang for the buck also result in more crowding out of
investment spending, which could reduce the long-term size of the economy (unless the
policy change increases public investment or induces private investment).
47 For the purpose of this discussion, government transfer payments, such as entitlement
benefits, are not classified as government spending.
48 Food stamps cannot be directly saved since they can only be used on qualifying purchases,
but a recipient could theoretically keep their overall consumption constant by increase their
other saving.
49 Brian Bucks et al, “Recent Changes in U.S. Family Finances: Evidence from the 2001 and
2004 Survey of Consumer Finances,” Federal Reserve Bulletin, vol. 92, February 2006, pp.
A1-A38.
50 For more information, see CRS Report RS21136, Government Spending or Tax
Reduction: Which Might Add More Stimulus to the Economy?, by Marc Labonte.

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CRS-18
Mark Zandi of Moody’s Economy.com has estimated multiplier effects for
several different policy options, as shown in Table 5.51 The multiplier estimates the
increase in total spending in the economy that would result from a dollar spent on a
given policy option. Zandi does not explain how these multipliers were estimated,
other than to say that they were calculated using his firm’s macroeconomic model.
Therefore, it is difficult to offer a thorough analysis of the estimates. In general,
many of the assumptions that would be needed to calculate these estimates are widely
disputed (notably, the difference in marginal propensity to consume among different
recipients and the size of multipliers in general), and no macroeconomic model has
a highly successful track record predicting economic activity. Thus, the range of
values that other economists would assign to these estimates is probably large.
Qualitatively, most economists would likely agree with the general thrust of his
estimates, however — spending provisions have higher multipliers because tax cuts
are partially saved, and some types of tax cuts are more likely to be saved by their
recipients than others.
Table 5. Zandi’s Estimates of the Multiplier Effect for Various
Policy Proposals
One year change in real GDP for
Policy Proposal
a given policy change per dollar
Tax Provisions
Non-refundable rebate
1.02
Refundable rebate
1.26
Payroll tax holiday
1.29
Across the board tax cut
1.03
Accelerated depreciation
0.27
Extend alternative minimum patch
0.48
Make income tax cuts expiring in 2010 permanent
0.29
Make expiring dividend and capital gains tax cuts
0.37
permanent
Reduce corporate tax rates
0.30
Spending Provisions
Extend unemployment compensation benefits
1.64
Temporary increase in food stamps
1.73
Revenue transfers to state governments
1.36
Increase infrastructure spending
1.59
Source: Mark Zandi, Moody’s Economy.com.
51 Mark Zandi, “Washington Throws the Economy a Rope,” Dismal Scientist, Moody’s
Economy.com, January 22, 2008.

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CRS-19
Timeliness. Timeliness is another criterion by which different stimulus
proposals have been evaluated. There are lags before a policy change affects
spending. As a result, stimulus could be delivered after the economy has already
entered a recession or a recession has already ended. First, there is a legislative
process lag that applies to all policy proposals — a stimulus package cannot take
effect until bills are passed by the House and Senate, both chambers can reconcile
differences between their bills, and the President signs the bill. Many bills get
delayed at some step in this process. As seen in Table 6, many past stimulus bills
have not become law until a recession was already underway or finished.

Table 6. Timing of Past Recessions and Stimulus Legislation
Beginning of Recession
End of Recession
Stimulus Legislation Enacted
Nov. 1948
Oct. 1949
Oct. 1949
Aug. 1957
Apr. 1958
Apr. 1958, July 1958
Apr. 1960
Feb. 1961
May 1961, Sep. 1962
Dec. 1969
Nov. 1970
Aug. 1971
Nov. 1973
Mar. 1975
Mar. 1975, July 1976, May 1977
July 1981
Nov. 1982
Jan. 1983, Mar. 1983
July 1990
Mar. 1991
Dec. 1991, Apr. 1993
Mar. 2001
Nov. 2001
June 2001
Source: Bruce Bartlett, “Maybe Too Little, Always Too Late,” New York Times, Jan. 23, 2008.
Second, there is an administrative delay between the enactment of legislation
and the implementation of the policy change. For example, Treasury Secretary Henry
Paulson has stated that if legislation were enacted quickly, rebate checks would be
sent out between May and July.52 When unemployment benefits were extended in
March 2002, there was about a three week lag between enactment and the adjustment
of benefits.53 Many economists have argued that new government spending on
infrastructure could not be implemented quickly enough to stimulate the economy in
time since infrastructure projects require significant planning. (Others have argued
that this problem has been exaggerated because existing plans or routine maintenance
could be implemented more quickly.) Others have argued that although federal
spending cannot be implemented quickly enough, fiscal transfers to state and local
governments would be spent quickly because many states currently face budgetary
shortfalls, and fiscal transfers would allow them to avoid cutting spending.54
52 Associated Press, “You Could Get Your Tax Rebate by May,” January 24, 2008.
53 The administrative lag could be longer in this case because the legislative lag to date was
longer in 2002, so the Department of Labor had longer to prepare. Unemployment benefits
were extended in the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147).
54 Transfers to state and local governments could be less stimulative than direct federal
(continued...)

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CRS-20
Finally, there is a behavioral lag, since time elapses before the recipient of a
transfer or tax cut increases their spending. It is unclear how to target recipients that
would spend most quickly, although presumably liquidity-constrained households
(i.e., those with limited access to credit) would spend more quickly than others. In
this regard, the advantage to direct government spending is that there is no analogous
lag. While monetary policy changes have no legislative or administrative lags,
research suggests they do face longer behavioral lags than fiscal policy changes
because households and business generally respond more slowly to interest rate
changes than tax or transfer changes.
Long-term Effects. As discussed above, while a deficit-financed policy
change can stimulate short-term spending, it can also reduce the size of the economy
in the long run through the crowding out effect on private investment. Stimulus
proposals can minimize the crowding out effect by lasting only temporarily — an
increase in the budget deficit for one year would lead to significantly less crowding
out over time than a permanent increase in the deficit. Among policy options,
increases in public investment spending would minimize any negative effects on
long-run GDP since decreases in the private capital stock would be offset by
additions to the public capital stock. Also, tax incentives to increase business
investment would offset the crowding out effect since the spending increase was
occurring via business investment.
Should Stimulus be Targeted? As discussed above, there is uncertainty
concerning whether the economy is headed for a recession. If it is not, a stimulus
package aimed at increasing total spending could be ineffective or even
counterproductive because of its effects on inflation, interest rates, and the trade
deficit. Even in the absence of a recession, it is clear that housing and financial
markets have already experienced sharp deterioration. In the absence of evidence
that there is an economy-wide recession, some economists have argued that stimulus
should be targeted at these depressed sectors, both to stabilize them and to prevent
the downturn from spreading to other sectors. Other economists argue that if the
current housing bust is being caused by the unwinding of a bubble, then it could be
detrimental for the government to interfere with natural market adjustment which is
bringing those markets back to equilibrium that, in the long run, is both necessary
and unavoidable. And some would argue that the best way to help a troubled sector
is by boosting overall demand. Besides the change in the GSE and FHA loan limits,
housing-focused legislation is likely to be considered separately from the stimulus
package.55
54 (...continued)
spending because state and local governments could, in theory, increase their total spending
by less than the amount of the transfer. (For example, some of the money that would have
been spent in the absence of the transfer could now be diverted to the state’s budget
reserves.) But if states are facing budgetary shortfalls, many would argue that in practice
spending would increase by as much as the transfer.
55 See CRS Report RL33879, Major Housing Issues in the 110th Congress, by Libby Perl et
al.

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