Order Code RL34349
Economic Slowdown:
Issues and Policies
Updated October 17, 2008
Jane G. Gravelle, Thomas L. Hungerford,
Marc Labonte, Edward V. Murphy, and N. Eric Weiss
Government and Finance Division
Julie M. Whittaker
Domestic Social Policy Division

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Economic Slowdown: Issues and Policies
Summary
Recent policies have sought to contain damages spilling over from housing and
financial markets to the broader economy. These policies include monetary policy,
which is the responsibility of the Federal Reserve, and fiscal policy. Legislators and
the President adopted an economic stimulus package (P.L. 110-185) on February 13.
Another stimulus package is under consideration. Over the past few months, the
government has also intervened in specific financial markets, including financial
assistance to troubled firms. Legislation authorizing a massive intervention in
financial markets was adopted on October 3 (P.L. 110-343); it includes authority to
purchase $700 billion in troubled assets.
The estimated budget cost of the stimulus enacted in February was about $150
billion for FY2008. The largest provision (in terms of budgetary cost) was a tax
rebate for individuals. The Senate committee bill also included an extension in
unemployment compensation benefits; the Iraq/Afghanistan supplemental
appropriations completed June 26 included a 13-week extension, signed on June 30.
The current stimulus proposal would increase spending on infrastructure,
unemployment benefits, Medicaid, and food stamps by $50 to $60 billion.
The need for additional fiscal stimulus depends on the state of the economy.
While the economy is not officially in a recession, there are signs that economic
activity is slowing. Growth rates, after two strong quarters, were negative in the
fourth quarter of 2007 but positive in the first and second quarters of 2008.
According to one data series, employment fell in every month of 2008. The
unemployment rate, which rose slightly during the last half of 2007, declined in
January and February of 2008, but began rising in March and in September stood at
6.1%. The continuing financial turmoil is also cause for concern. Forecasters, while
projecting slower growth in 2008, remain uncertain about the likelihood of a
recession. Some economists have predicted a recession based on the downturn in the
housing market, its spillover into financial markets, and the rise in energy prices.
Other economists have believed that the Fed’s recent decisions to significantly reduce
interest rates, and natural market adjustment, along with the already enacted stimulus,
would be enough to avoid recession.
Fiscal policy temporarily stimulates the economy through an increase in the
budget deficit. 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. Economists generally
agree that spending proposals are somewhat more stimulative than tax cuts since part
of a tax cut will be saved by the recipients. The most important determinant of the
effect on the economy is its size. The recent stimulus package increased the deficit
by about 1% of GDP.
The broad intervention into the financial markets has been passed to avoid the
spread of financial instability into the broader market but there are disadvantages,
including leaving the government holding large amounts of mortgage debt.

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Contents
The Current State of the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Is Additional Fiscal Stimulus Needed? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Stimulus Proposals Enacted and Considered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Tax Rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Preliminary Evidence on the Rebates’ Economic Effects . . . . . . . . . . 13
Business Tax Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Housing Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Extending Unemployment Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Senate Committee Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
P.L. 110-252, Emergency Unemployment Compensation (EUC08) . . 24
A Second Stimulus Package? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Comparing the Macroeconomic Effects of Various Proposals . . . . . . . . . . 27
Bang for the Buck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Timeliness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Long-term Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Should Stimulus be Targeted? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Interventions for Financial Firms and Markets . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Case-by-case Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Too Big to Fail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Too Complex to Fail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Broad Based Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Remove Illiquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Broad based injection of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
List of Tables
Table 1. Estimated Budget Cost of Original House Bill (H.R. 5140) . . . . . . . . . . 9
Table 2. Estimated Budget Cost for the Economic Stimulus Act of 2008 as
Reported by the Senate Committee on Finance . . . . . . . . . . . . . . . . . . . . . . 10
Table 3. Estimated Budgetary Cost of the Final Bill, H.R. 5140 . . . . . . . . . . . . 10
Table 4. Comparative Provisions of the Rebate . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 5. Receipt of Rebates by Month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Table 6. Business Tax Provisions of the House, Senate Committee and
Final Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Table 7. Zandi’s Estimates of the Multiplier Effect for Various Policy
Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Table 8. Timing of Past Recessions and Stimulus Legislation . . . . . . . . . . . . . . 30

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Economic Slowdown: Issues and Policies
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 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 contained provisions not included in the House bill. On February 7, the Senate
adopted the House bill with added rebates for retirees and the House adopted the
revised bill. On February 13, the bill was signed into law as P.L. 110-185.
Some proposals discussed but not adopted in that package might be considered
in a second stimulus bill. At this point the scope of a second proposal remains
uncertain. A provision that was considered (but not enacted) in the February
stimulus bill and that might be considered in a second was a 26-week extension of
unemployment benefits. The Iraq/Afghanistan supplemental appropriations, adopted
by Congress on June 26 and signed by the President on June 30 as P.L. 110-252,
extended benefits for 13 weeks. A second stimulus plan (H.R. 7110) passed the
House on September 26 and included $36.9 billion on infrastructure ($12.8 billion
highway and bridge, $7.5 billion water and sewer, $5 billion Corps of Engineers);
$6.5 billion in extended unemployment compensation, and $14.5 billion in Medicaid,
and $2.7 billion in food stamp and nutrition programs. On October 3, the House
passed the Unemployment Compensation Extension Act of 2008 (H.R. 6867), which
would provide extended unemployment benefits. The bill will be considered by the
Senate in a lame-duck session in November.
Financial market conditions worsened significantly in September 2008.
Although the real production of goods and services has so far showed unexpected
resilience since financial turmoil began in August of 2007, the ability of private
borrowers to access credit markets remained restricted throughout the year. Evidence
of a credit crunch was seen in the persistence of wide spreads between the interest
rates that private borrowers paid for credit and the yields on Treasury securities of
comparable maturity. One indication of restricted credit despite stimulative Federal
Reserve monetary policy was the failure of mortgage rates to fall significantly.
Instead, the spread between Treasuries and Government Sponsored Enterprise (GSE)
bonds remained elevated over the summer. The newly created Federal Housing
Finance Agency (FHFA) cited the persistence of this wide spread as a major factor
in its decision to place the GSEs in conservatorship in September. During the week
of September 15-19, financial markets were further disturbed by the bankruptcy of
investment bank Lehman Brothers and Federal Reserve intervention on behalf of the
insurer AIG. These actions eroded market confidence further, resulting in a sudden
spike of the commercial paper rate spread from just under 90 basis points to 280
basis points, a spike that in times past might have been called a panic. If financial

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market confidence is not restored and private market spreads remain elevated, the
broader economy could slow due to difficulties in financing consumer durables,
business investment, college education, and other big ticket items.
On September 18, Administration and Federal Reserve officials with the
bipartisan support of the Congressional leadership, announced a massive intervention
in the financial markets, requesting authority to purchase up to $700 billion in assets
over the next two years. The Treasury has also provided insurance for money market
funds, where withdrawals have been significant. Congressional leaders and other
Members raised a number of issues and made some additional proposals, which
included setting up an oversight mechanism, restrictions on executive compensation
of firms from which assets are purchased, acquiring equity stakes in the participating
firms, and allowing judges to reduce mortgage debt in bankruptcies (not included in
the final Act).
A tentative agreement announced September 26 by the Senate Banking
Committee and the House Financial Services Committee would allow an initial $250
billion of financing with an additional $100 billion upon certification of need, with
Congress allowed 30 days to object to the final $350 billion. The plan would have
oversight by an Inspector General, audit by the Governmental Accountability Office,
setting standards of appropriate compensation, and providing for equity positions in
all participating companies. A final proposal, H.R. 3997, which termed the program
the Troubled Asset Relief Program (TARP) also included an oversight board and
options for firms to purchase insurance, failed to pass in the House. A second bill
(H.R. 1424) that preserved the central elements of the failed proposal but added an
expansion of deposit insurance coverage was passed by the Senate on October 1, by
the House on October 3, and signed into law as P.L. 110-343. There are, however,
concerns about how to price acquired assets in a way that balances protection of
taxpayers with providing adequate assistance to firms. The Treasury had indicated
use of a reverse auction mechanism to purchase mortgage backed securities, where
companies will bid to sell their assets. It is not clear how well such an auction would
work with heterogeneous assets.1 However, the Treasury has announced that it will
use the first $250 billion authorized to purchase preferred stock in financial
institutions.
This report first discusses the current state of the economy, including measures
that have already been taken by the monetary authorities, and assesses the need for
and potential consequences of fiscal stimulus. The second part of the report reviews
the proposals discussed during debate on the recently enacted fiscal stimulus, both
those adopted and those considered but not adopted. The various stimulus packages
differed somewhat, and the report briefly describes those differences. This section
also includes a discussion of the potential elements of a second stimulus proposal,
and concludes with a discussion of the macroeconomic effects of the proposals. The
final section of the paper discusses recent and proposed financial interventions.
1 See CRS Report RL34707, Auction Basics: Background for Assessing Proposed Treasury
Purchases of Mortgage-Backed Securities, by D. Andrew Austin.

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The Current State of the Economy2
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.3 According to the
latest available data, income has not yet experienced a lasting or significant decline.
Employment has declined since the beginning of the year, but at a more modest pace
than is typically experienced during a recession.4 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 November 2001, the same month in which the NBER later
declared the recession to have ended.
Originally, not all professional economic forecasters were convinced that the
economy is heading toward a recession. According to the firm Blue Chip, 50
professional forecasters had predicted, on average, about a 60% chance of a recession
in 2008.5 However, more recently a consensus has developed that the economy is in
a recession.6 After two strong quarters, economic growth fell by 0.2% in the fourth
quarter of 2007 and increased by 0.9% in the first quarter of 2008. (Although
negative growth is not an official prerequisite for a recession, all historical recessions
have featured it.) Revised figures show, however, a 2.8% growth in the second
quarter of 2008. Nevertheless, some economists fear that the likelihood of a recession
remains 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
2 This section was prepared by Marc Labonte of the Government and Finance Division.
3 National Bureau of Economic Research, The NBER’s Recession Dating Procedure,
January 7, 2008.
4 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 the first eight months of 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 rose in
the second half of 2007. Unemployment declined slightly in January and February 2008 to
4.8%. By August 2008, however, the unemployment rate was at a five-year high of 6.1%.
For data on growth, employment, and other indicators, see CRS Report RL30329, Current
Economic Conditions and Selected Forecasts, by Gail E. Makinen.
5 Blue Chip, Economic Indicators, vol. 33, no. 9, September 10, 2008.
6 Blue Chip, Economic Indicators, vol. 33, no. 10, October 10, 2008.

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the Great Depression, according to the organization which compiles the data.7 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 through 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.”8
Most economists believe that a housing downturn alone would not be enough
to singlehandedly cause a recession.9 But in August 2007, the housing downturn
spilled over to widespread financial turmoil.10 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 2007, and has since reduced interest
rates significantly. Recent cuts in interest rates by the Federal Reserve included a cut
the federal funds rate by three-quarters of a percentage point on March 18 and an
additional cut of a quarter of a percentage point on April 30.
To date, financial markets remain volatile, new losses have been announced at
major financial institutions, and responses outside traditional monetary policy have
been undertaken. In March, the financial firm Bear Stearns encountered liquidity
problems, was provided emergency financing by JPMorgan Chase and the Federal
Reserve Bank of New York, and was purchased, after a plummet in stock value, by
JPMorgan Chase. Then in July, the government sponsored enterprises (GSEs) Fannie
Mae and Freddie Mac experienced rapidly falling equity prices in response to
concerns about the value of their mortgage backed securities assets. In July,
Congress authorized Treasury to extend the GSEs an unlimited credit line (which has
not been utilized to date) in H.R. 3221 because of concern that the failure of a GSE
would cause a systemic financial crises. 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. The federal government took control of
Fannie Mae and Freddie Mac in early September. According to news reports,
government officials decided not to intervene on behalf of Lehman Brothers and
7 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.
8 For more information, see CRS Report RL34244, Would a Housing Crash Cause a
Recession?, by Marc Labonte.
9 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.
10 See CRS Report RL34182, Financial Crisis? The Liquidity Crunch of August 2007, by
Darryl Getter et al.

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Merrill Lynch;11 on September 14 Bank of America took over Merrill Lynch without
federal intervention, and on September 15, Lehman Brothers filed for bankruptcy.
The Treasury and Federal Reserve were trying to engineer a private bailout of the
nations largest insurance company, AIG, but on September 16 seized control with an
$85 billion emergency loan.12
On September 18, Administration and Federal Reserve officials with the
bipartisan support of the Congressional leadership, announced a massive intervention
in the financial markets.13 The proposal asked for authority to purchase up to $700
billion in assets over the next two years. The Treasury has also provided insurance
for money market funds, where withdrawals have been significant. These proposals
suggest that government economists see problems with the transmission of traditional
monetary stimulus into the financial sector and ultimately into the broader economy,
where a significant contraction of credit could significantly reduce aggregate demand.
Although the legislation passed with some delay, the stock market has fallen
significantly in recent days. The original proposal had discussed buying mortgage
related assets, particularly mortgage-backed securities, but the Treasury has indicated
it will spend the initial $250 billion on preferred stock in financial institutions.
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 $94 per barrel in the four weeks ending March 14, 2008; the price
rose to $115 dollars as of April 30, 2008 and $144 as of July 2, 2008. Recently the
price has fallen to $118 as of August 27, 2008. Oil prices continued to fall and were
around $90 on September 16. This latter drop was attributed to expectations of an
economic downturn. The price rose and has fluctuated, standing at $105 on
September 26 and under $90 on October 6. By October 17, it has fallen below $70.
Most recessions since World War II, including the most recent, have been preceded
by an increase in energy prices.14 Energy prices had gone up almost continuously in
the current expansion, however, without causing a recession, which may point to the
relative decline in importance of energy consumption to production. Although a
housing downturn (and associated financial turmoil) or an energy shock might not
be enough to cause a recession in isolation, the combination could be sufficient.
In sum, there are some indications that a slowdown has occurred and that there
are problems in several sectors. Growth rates, after two strong quarters, were
negative in the fourth quarter of 2007 but were positive in the first and second
quarters of 2008. According to one data series, employment fell in the first three
11 David Cho and Neil Irwin, “No Bailout: Feds Made New Policy Clear in One Intense
Weekend,” Washington Post, September 16, 2008, pp. A1, A6-A7.
12 Glenn Kessler and David S. Hilzenrath, “AIG at Risk; $700 Billion in Shareholder Value
Vanishes,” Washington Post, September 16, 2008; U.S. Seizes Control of AIG With $85
Billion Emergency Loan, Washington Post, September 17, 2008, pp. A1, A8.
13 See CRS Report RS22957, Proposal to Allow Treasury to Buy Mortgage-Related Assets
to Address Financial Instability, by Edward V. Murphy and Baird Webel.
14 For more information, see CRS Report RL31608, The Effects of Oil Shocks on the
Economy: A Review of the Empirical Evidence, by Marc Labonte.

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quarters of 2008. The unemployment rate, which was 4.8% in February 2008, rose
to 6.1% in August 2008 and remained there in September 2008. Forecasters, while
projecting slower growth in 2008, remain uncertain about the likelihood of a
recession. Problems exist in several different sectors of the economy: housing,
energy, and financial markets. The continuing turmoil in financial markets could
result in a credit crunch and result in contractions in the interest sensitive sectors of
the economy.
Is Additional 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.15

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.
Because 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 up interest rates.16 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
15 For more information, see CRS Report RL34072, Economic Growth and the Business
Cycle: Characteristics, Causes, and Policy Implications, by Marc Labonte.
16 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.

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business investment and budget deficits.17 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.18 Some
economists argue that these costs outweigh the benefits of fiscal stimulus.
The most important determinant of a stimulus’ macroeconomic effect is its size.
The recently adopted stimulus package (P.L. 110-185) 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%.19 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.
Although a consensus is developing that the economy is in a recession, it is
uncertain whether any additional stimulus is needed. Economic forecasts are
notoriously inaccurate due to the highly complex nature of the economy. With the
economy in 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
recovers quickly, 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. There is an increasing concern that the inflation rate has become
uncomfortably high, and additional stimulus could exacerbate inflationary pressures.
In judging the need for an additional stimulus package, policymakers might also
consider that stimulus is already being delivered, in addition to the stimulus package
passed in February, 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
17 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.
18 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.
19 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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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. In January, the Congressional Budget Office projected
that under current policy, which excluded the February stimulus package, the budget
deficit would increase by $56 billion in 2008 compared to 2007. This amount is
significant, although smaller than, the approximately $150 billion deficit increase due
to the recent stimulus package.20
Second, the Federal Reserve has already delivered a large monetary stimulus.
By the end of April 2008, the Fed had reduced overnight interest rates to 2% from
5.25% in September 2007.21 On October 8, the interest rate was lowered to 1/5%.
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.22
Presumably, the Federal Reserve has chosen a monetary policy that it believes
will best avoid a recession given the actions already taken. If it has chosen that
policy correctly, an argument can be made that an additional fiscal stimulus is
unnecessary since the economy is already receiving the correct boost in spending
through lower interest rates and through the first stimulus package. In this light,
additional 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, and direct intervention in financial markets is not adequate.23
20 In March 2008, CBO projected the budget deficit for FY2008 compared to FY2007 to
increase to $193 billion, largely reflecting the stimulus package of $153 billion, offset by
some other small reductions. Note also that, in January, CBO estimated that if supplemental
military spending to maintain current troop levels overseas and an alternative minimum tax
patch are enacted, and expiring tax provisions are extended, the 2008 deficit could increase
by $98 billion in total compared to 2007. This projection was made in the absence of
stimulus legislation and would increase the $56 billion deficit increase by $42 billion.
21 For interest rate changes see CRS Report 98-856, Federal Reserve Interest Rate Changes
2000-2008, by Marc Labonte and Gail Makinen.
22 For more information, see CRS Report RL30354, Monetary Policy and the Federal
Reserve, by Marc Labonte and Gail E. Makinen.
23 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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CRS-9
Stimulus Proposals Enacted and Considered
The Congress enacted and the President signed a stimulus package in February
of 2008, although a second package may still be considered. During discussion of
the stimulus package, a variety of proposals were advanced. The administration
proposed initially to largely limit the stimulus to a tax reduction, but there was also
discussion in Congress of spending programs such as extending unemployment
benefits and food stamps. The House leadership initially negotiated a proposal with
the administration which included refundable rebates to low income workers; the
Senate added rebates for low income retirees and unemployment benefit extensions,
with the former eventually adopted and the latter not adopted.
The House, Senate Finance Committee, and final versions of the 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.
Table 1. Estimated Budget Cost of Original
House Bill (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 compensation 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.
The final bill followed the House proposal in all respects except for
modifications to the rebate. The Senate’s proposal to extend the House proposal’s
rebates to Social Security recipients and disabled veterans, and to prohibit them for
illegal immigrants was included in the final bill, increasing the first year cost by $6
billion. The legislation also included appropriations to carry out rebates.

---

CRS-10
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
Compensation
Total
-158.1
-45.7
-155.7
Source: Joint Committee on Taxation, JCX-13-08, Jan. 30, 2008.
Table 3. Estimated Budgetary Cost of the Final Bill, H.R. 5140
(billions of dollars)
Provision
FY2008
FY2009
FY2008-2018
Rebates for Individuals
-106.7
-10
-116.7
Appropriations to Carry Out
-0.2
-0.1
-0.3
Rebates
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
-151.7
-16.3
-124.5
Source: Joint Committee on Taxation, JCX-17-08, Feb. 8, 2008.
Tax Rebates24
The centerpiece of both the original House bill (H.R. 5140), the Senate
committee proposal, and the final legislation is the tax rebate for individuals. Unlike
the 2001 rebate, the rebates have elements of refundability, although the Senate
committee proposal’s and the final bill’s refundability is greater than in the initial
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.25 The
final proposal adds $6 billion in the first year to the original House plan. The rebate
24 This section was prepared by Jane Gravelle, Government and Finance Division.
25 Joint Committee on Taxation, See JCX-6-08 and JCX-9-08, [http://www.house.gov/jct/].

---

CRS-11
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 4. The
first is the basic nature of the rebate. The House proposal effectively suspended 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 allowed a
flat rebate of $500 for single individuals and $1,000 for couples. The basic rebate
follows the House plan.
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. The
final bill allows the refundability for Social Security, but at the lower House rebate
level.
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 final bill follows the House provisions.
The fourth element is the child rebate, which in all plans is set at $300 per child
and allowed if a basic or refundable rebate is received.
The fifth element, present initially 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. These provisions were included in the final bill.
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 original House bill, 20% would not receive a credit
and in the Senate committee proposal and final legislation, 6.5% would not.26 The
increase in coverage in the Senate committee proposal and final bill is due to
coverage of the elderly. The original House bill is more progressive (i.e., relatively
more favorable to lower income households) than a non-refundable rebate, and the
26 See CRS Report RL34341, Tax Rebate Refundability: Issues and Effects, by Jane G.
Gravelle.

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CRS-12
Senate committee bill is more progressive than the House bill (except at the top of
the income distribution).
Table 4. Comparative Provisions of the Rebate
Provision
House Bill
Senate Committee Bill
Final Bill
General
10% of the first $6,000
Flat rebate of $500,
Same as House
Rebate
of taxable income
$1,000 for couples
Proposal
($12,000 for couples),
to extent of tax liability
(maximum
$600/$1,200)
Refundability
$300 rebate ($600 for
Full $500 rebate allowed if
Same as Senate,
Provisions
couples) available if
earned income plus Social
but with House
earned income is at
Security benefits are at least
rebate level of
least $3,000
$3,000 or taxable income is at
$300.
least $1.
High Income
Phased out at 5% of
Phased out at 5% of income
Same as House
Phase-out
income over $75,000
over $150,000 for single
Provisions
for single individuals,
individuals, $300,000 for
$150,000 for couples
couples.
Child
$300 per qualifying
$300 per qualifying child if
Identical
Provisions
child if eligible for any
eligible for any other rebate
Provisions
other rebate
Other
None
Expands rebates to veterans
Same as Senate,
Features
receiving disability; disallows
with House
the rebate to illegal immigrants.
rebate level of
$300.
Source: CRS.
Although some rebates in the past appeared to be relatively ineffective in
increasing spending, there is some evidence the 2001 rebate was spent.27 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.28
27 See CRS Report RS22790, Tax Cuts for Short Run Economic Stimulus: Recent
Experiences, by Jane G. Gravelle.
28 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].

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CRS-13
Preliminary Evidence on the Rebates’ Economic Effects. Mainstream
economic theory states that overall spending in the economy is stimulated only if the
rebates lead to higher consumption. But households may decide to consume or save
the rebates. There are now data available on disposable income and personal
consumption expenditures through June 2008 to begin to judge whether the rebates
have led to higher consumer spending. Table 5 shows the breakdown of rebate
checks sent by month. Through the end of June, $79.8 billion (or three quarters of
the rebates) were received.29
Table 5. Receipt of Rebates by Month
Rebates Received
(billions of dollars)
April
$4.3
May
$45.7
June
$29.8
July
$12.0
Source: CRS calculations based on data from the U.S. Treasury.
Households may choose to increase consumption before, when, or after the
rebates are received. (Households might decide to increase consumption beforehand
in anticipation of receiving the rebate, assuming they are not liquidity constrained,
meaning they had access to credit or savings.) Thus, to evaluate the full effects of the
rebate on consumption would require data for all three periods, as well as
assumptions about how quickly the rebate will be spent. At this point, only prior and
contemporaneous consumption data are available; some of the stimulative effects will
come in future months, making this analysis incomplete at present. Furthermore, the
data available at this time are preliminary, and future revisions to the data could
potentially result in a fundamentally different picture of the rebates’ effects.
Figure 1 illustrates that there was an increase in disposable income (i.e., income
net of taxes) in June that far exceeded normal monthly fluctuations. Disposable
income rose 0.1% in April, 5.2% in May, and fell 2.6% in June. (The fall in June is
caused by fewer rebates being paid out in June than in May. Disposable income in
June was 2.4% higher than in April.) The Bureau of Economic Analysis estimates
that in the absence of the rebates, disposable income would have fallen by 0.1% in
May and 0.4% in June.30 Yet, as shown in Figure 1, the large increase in disposable
income has not yet led to any perceptible rise in consumption spending above the
trend.31 Consumption spending rose 0.1% in April, 0.3% in May, and fell 0.2% in
29 The remaining quarter of rebates were received since June 30 or will be received between
now and next April as additional tax returns are filed.
30 Bureau of Economic Analysis, “Income Growth Affected by Rebates,” news release,
August 4, 2008.
31 All figures discussed in this paragraph measure the change since the previous month and
(continued...)

---

CRS-14
June. The rise in May is slightly above average, but the changes in April and June
are below average. There was a large increase in personal saving from 0.3% of
disposable income in April to 4.9% in May and 2.5% in June, suggesting that the
rebates have mostly resulted in higher personal saving, to date. As noted previously,
there may be a lag between receiving a rebate and increasing consumption.
Consumption in March, the month before the rebate checks were first sent, rose 0.3%
— it is debatable how much of this increase might be attributable to the anticipation
of rebate checks not yet received.
Another weakness in the argument that the rebate checks have already
stimulated the economy is the fact that the overall economy grew at a more rapid
pace than consumption in the second quarter of 2008. GDP growth was 1.9%, while
consumption grew by 1.5% in the second quarter. Government spending, net
exports, and even non-residential investment (which typically shrinks during a
recession) all grew at a more rapid pace than consumption in the second quarter,
despite the boost to disposable income from the rebate checks.32 (GDP growth for
the second quarter has recently been revised to 3.3%, however).
Figure 1: Consumption, Disposable Income, and Rebate Checks,
January 2007 to June 2008
5.00%
$50
4.00%
$40
3.00%
$30
te
$
a
2.00%
$20
r
of
th
1.00%
$10
w
o
0.00%
$0
lions
gr -1.00%
-$10
bil
-2.00%
-$20
-3.00%
-$30
ar
ay
p
ar
ay
-Jul
ov
an
07-Jan
07-M
07-M
07
08-J
08-M
08-M
20
20
007-Se
20
20
2
2007-N
20
20
20
Consumption
Disposable Income
Rebate Checks
Source: CRS calculations based on data from the Bureau of Economic Analysis.
Note: Consumption and Disposable Income data are adjusted for inflation. Rebate checks
are not adjusted for inflation.
31 (...continued)
have been adjusted for inflation.
32 Inventory reduction was a large drag on growth in the second quarter, which suggests that
producers responded to higher consumption by reducing inventories rather than increasing
production.

---

CRS-15
The effectiveness of the rebates in boosting overall spending could in theory be
reduced by “leakages” into higher inflation, interest rates, or imports.33 Prices for
personal consumption expenditures rose at an annualized rate of 4.2% in the second
quarter of 2008. Much of this increase was due to food and energy prices. Thus, the
argument can be made that most of the rise in nominal consumption in the second
quarter went toward price increases rather than higher consumption in inflation-
adjusted terms. Spending on real imports fell by 6.6% in the second quarter, so that
does not appear to be a source of “leakage.” Likewise, interest rates in general did
not show much movement during the second quarter.
The effects of the rebates on consumption cannot be determined by looking at
the absolute growth of consumption in isolation. Rather, we need to compare actual
growth to the growth in consumption that would have occurred in the counterfactual
case without any rebates. Since there is no way of observing the counterfactual,
economists must rely on economic models to conjecture about the counterfactual.
One simple counterfactual would be to compare consumption following the rebates
to consumption in a typical month. By this measure, the rebates seemed to have had
no discernible effects so far. But there are good reasons to think that the past three
months have not been typical months — namely, because of the slowdown in the
economy and the resulting rise in unemployment and decline in consumer
confidence.
Goldman Sachs estimates that the counterfactual would have been for
consumption to have fallen by 1.5%-1.75% in the second quarter. Compared to this
counterfactual, Goldman Sachs estimates the rebates to have boosted consumption
by $22.5 billion to $25.2 billion and consumption growth by 3.1 to 3.3 percentage
points in the second quarter. Of the total boost to spending, Goldman Sachs analysts
attribute $1.7 billion to $2.3 billion to higher spending in March in anticipation of
receiving the rebate checks.34 Their counterfactual decline in consumption spending
is strikingly large, however. Consumption spending has not fallen by as much as
they assume (or even been negative) since the fourth quarter of 1991. Disposable
income excluding the rebates does not show a similarly large decline. A less
pessimistic assumption about consumption in the counterfactual would have resulted
in a smaller estimate of the boost to consumption from the rebates.
The ultimate success of the rebates will depend partly on whether they help
move consumption onto a path of sustainable growth in the future. If consumption
falls after the effect of the rebates wears off, some may argue that the rebates will
have at best postponed the economic downturn. Goldman Sachs predicts that by the
fourth quarter of 2008 the effect of the rebates on GDP will have worn off, “at which
point we (fore)see renewed stagnation in U.S. output.”35
33 For an explanation of the relationship between fiscal stimulus and these factors, see CRS
Report RL34072, Economic Growth and the Business Cycle: Characteristics, Causes, and
Policy Implications, by Marc Labonte.
34 Goldman Sachs, “Rebates Helped Avoid a Drop in Real Spending Last Quarter,” U.S.
Daily Financial Market Comment, August 5, 2008.
35 Ibid.

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CRS-16
Economist Martin Feldstein argues that the rebates should be deemed a failure
because they have had very little “bang for the buck.”36 He argues that rebates, which
added nearly $80 billion to disposable income to date, have resulted in additional
consumption of only $12 billion. In other words, about 15% of the money spent on
the rebates served its stated purpose. (Goldman Sachs was more generous in
crediting consumption spending to the rebates, concluding that the rebates added
$22.5 to $25.2 billion to consumption, which is still considerably less than $80
billion.) Feldstein attributes the rebates’ ineffectiveness to their having been mostly
saved, and argues that a permanent tax cut would have been spent at a much higher
rate than a one-time rebate. Two points can be made about Feldstein’s conclusions.
First, the $12 billion estimate understates the rebates’ ultimate effects since
somewhat more of the rebates are likely to be spent in future months. Second, the
ineffectiveness of the rebates due to the saving effect is a more powerful argument
for direct government spending, rather than permanent tax cuts, as a more cost-
effective way to stimulate the economy in the short-term since none of government
spending is saved.37
A study based on survey data of household non-durable consumption concluded
that
the average family spent around 20% of their rebate in the first month after
receipt. Extrapolating similarly over time, our estimates imply that the receipt
of the tax rebates directly raised non-durable PCE (personal consumption
expenditures) by 2.4% in the second quarter of 2008 and will raise it by 4.1% in
the third quarter.38
Their findings of relatively large effects at the household level can be reconciled to
the macroeconomic data on a few grounds. First, their study examined only the
consumption of non-durable goods. In the second quarter, non-durable consumption
rose by 4.0% but consumption of durable goods fell by 3.0% at annualized rates. It
is questionable why the effect of the rebates would be found in non-durable goods,
and not durable goods. Second, the bulk of their estimated effect has not yet
occurred and is based on their assumptions about future spending. Third, household
survey data should be viewed with skepticism due to sample size, reporting error, and
other issues.39
36 Martin Feldstein, “The Tax Rebate Was a Flop. Obama’s Stimulus Plan Won’t Work
Either,” Wall Street Journal, August 6, 2008, p. A15.
37 See CRS Report RS21136, Government Spending or Tax Reduction: Which Might Add
More Stimulus to the Economy?, by Marc Labonte.
38 Christian Broda and Jonathan Parker, “The Impact of the 2008 Tax Rebates on Consumer
Spending: Preliminary Evidence,” working paper, July 29, 2008.
39 J. Steven Landefeld, Eugene P. Seskin, and Barbara M. Fraumeni, “Taking the Pulse of
the Economy: Measuring GDP,” Journal of Economic Perspectives, Spring 2008.

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CRS-17
Business Tax Incentives40
The original House bill included two business provisions. The first was 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 addressed
a provision that allowed 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 had these same provisions,
although it modified bonus depreciation by allowing a deduction over two years
instead of one. It also added 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 have allowed
businesses to use only one of the three provisions. The Senate committee proposal
also included the extension of some energy provisions that largely relate to
businesses. These provisions are compared in Table 6. The final bill followed the
original House provisions.
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.41
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
40 This section was prepared by Jane Gravelle, Government and Finance Division.
41 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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CRS-18
does not suggest these provisions work very well to induce short-term spending.42
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.

Table 6. Business Tax Provisions of the House,
Senate Committee and Final Plans
House Bill (H.R. 5140)
Senate Committee Bill
Final Bill
Bonus
For 2008, allows 50% of
For 2008, elect to allow
Same as House.
Depreciation
eligible investment
50% of investment to be
(generally equipment) to
deducted equally over the
be deducted when incurred
first two years
Small
For 2008, increases the
For 2008, elect to increase
Same as House.
Business
amount of eligible
the amount of eligible
Expensing
investment (generally
investment (generally
equipment) expensing
equipment) expensing from
from $128,000 to
$128,000 to $250,000;
$250,000; begin phaseout
begin phaseout out at
at $800,000 instead of
$800,000 instead of
$510,000.
$510,000.
Net Operating
None
Elect to increase NOL
Same as House.
Loss (NOL)
carryback from two years
Carryback
to five years for 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
Same as House.
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.
42 See CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, and CRS
Report RS22790, Tax Cuts for Short Run Economic Stimulus: Recent Experiences, by Jane
G. Gravelle.

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CRS-19
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 2008.43 Their overall cost is
$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 Provisions44
The act allows 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 is
an increase above the permanent conforming loan limit of $417,000. The limit for
any area is 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).
Under this provision, Fannie Mae and Freddie Mac can continue to purchase
loans in high-cost areas that qualify after December 31, 2008. However the GSEs are
charters restrict them to acquiring loans no more than one year old.
The Federal Housing Administration (FHA) has temporary authority to insure
mortgages in high-cost areas up to this $729,750 limit. The authority expires
43 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
renewable energy bonds, and the energy efficient commercial property deduction.
44 This section was prepared by Eric Weiss, Government and Finance Division.

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CRS-20
December 31, 2008. The FHA permanent limit ranges from $200,160 to $362,790
in high-cost areas.45
H.R. 3221, Housing and Economic Recovery Act of 2008, as signed into law
on July 30, 2008, would permanently increase the high cost loan limit to 115% of the
area median house price, but no greater than 150% of the national conforming loan
limit, beginning in 2009. The national maximum would have been $625,000 in 2008
if the bill had been effective at that time. The bill would use $417,000 as the base
for future changes in the conforming loan limit, eliminating the $700 decline that was
“banked” against future increases in October 2006.46
The FHA high cost limits would be similar to the conforming loan limit.
Many of those supporting the increases believe they provide a needed stimulus
to housing and mortgage markets.47
Factors tending to limit the impact of the increased mortgage limits are as
follows:
! Existing loan-to-value ratio limits continue to apply. This prevents
homeowners who owe more on a house than its appraised value
from participating in the program.
! Existing credit worthiness and debt-to-income requirements apply.
This would prevent anyone not current on their mortgage from
refinancing.
! The reduction of the 30% extra capital requirement to 20% could
allow the GSEs to purchase and hold an additional $200 billion in
mortgages. The GSEs could also purchase additional mortgages by
following the suggestion in the Economic Stimulus Act of 2008 and
H.R. 3221 to package these mortgages, add their guarantees, and
sell mortgage-backed securities (MBS) to large investors.
These housing-related provisions of the act could narrow or eliminate the spread
between loans above the permanent loan limit (but under temporary 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, could
45 FHA limits are available from HUD’s website at [https://entp.hud.gov/
idapp/html/hicost1.cfm].
46 Office of Federal Housing Enterprise Oversight, Department of Housing and Urban
Development, “Notice of Final Examination Guidance — Conforming Loan Limit
Calculations; Response to Comments,” 73 Federal Register, 16895-16899, March 31, 2008.
[http://www.ofheo.gov/media/guidance/CLLGuidanceFR32608.pdf]
47 James R. Haggerty and Damian Paletta, “Details Lacking on Mortgage-Relief Plan,” Wall
Street Journal, January 26, 2008, p. A6.

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! Help homebuyers with good credit obtain lower interest rates on
loans in the affected range. The monthly payments on a 30-year
fixed-rate $600,000 mortgage could fall from $3,824 to $3,377,
saving $447 per month.48 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;
! 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, DC area. Most other parts of the
nation have home prices that do 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 limit is temporarily increased to $462,000;
! Likely have little impact in areas and houses where the permanent
conforming loan limits 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;49
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.50
48 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=].
49 12 U.S.C. 4562-4564 and 4566.
50 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.

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Extending Unemployment Benefits51
The Senate proposal included an extension of unemployment benefits, but these
provisions were not included in the final economic stimulus legislation.52 However,
an extension (Emergency Unemployment Compensation) was included in the
Iraq/Afghanistan supplemental appropriations (H.R. 2642), which was passed by the
Senate on June 26 and sent to the President, who signed it on June 30 (P.L. 110-
252).53
Originally, the intent of the Unemployment Compensation (UC) program was,
among other things, to help counter economic fluctuations such as recessions.54 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
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.55
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. The EB program, like the UC program,
is permanently authorized. As of July 21, 2008 the EB program is triggered on in
two states, Alaska and Rhode Island.
In addition to the current EUC08 program, Congress acted seven other times
— in 1958, 1961, 1971, 1974, 1982, 1991, and 2002 — to establish 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;
51 This section was prepared by Julie M. Whittaker, Domestic Social Policy Division.
52 For further discussion of proposals, see CRS Report RL34460, Current Law and Selected
Proposals Extending Unemployment Compensation, by Julie Whittaker.
53 See CRS Report RS22915, Emergency Unemployment Compensation (EUC08), by Julie
M. Whittaker for information on the new temporary benefit.
54 See, for example, President Franklin Roosevelt’s remarks at the signing of the Social
Security Act [http://www.ssa.gov/history/fdrstmts.html#signing].
55 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.

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many temporary programs considered the state’s TUR and/or the state’s insured
unemployment rate (IUR).
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.56 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.57
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.58 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
56 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].
57 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].
58 For example, Shrek, James and Patrick Tyrell, Unemployment Insurance Does Not
Stimulate the Economy, Web memo #1777, January 2008: [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-24
individual’s weekly regular UC benefit (including any dependents’ allowances). The
temporary extension would be financed 100% by the federal government.
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.59
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.
P.L. 110-252, Emergency Unemployment Compensation (EUC08).
A 13-week extension (without the additional 13-week high unemployment extension
for certain areas) was enacted in H.R. 2642, the Iraq/Afghanistan supplemental
appropriations bill. The Emergency Unemployment Compensation (EUC08)
program provides up to 13 additional weeks of unemployment benefits to certain
workers who have exhausted their rights to regular UC benefits. The program
effectively began July 6, 2008, and will terminate on March 28, 2009. No EUC08
benefit will be paid beyond the week ending July 4, 2009.
59 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%.

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CRS-25
EUC08 and EB Interactions. The EUC08 program allows states to
determine which benefit is paid first. Thus, states may choose to pay EUC08 before
EB or vice versa. States balance the decision of which benefit to pay first by
examining the potential cost savings to the state with the potential loss of
unemployment benefits for unemployed individuals in the state. It may be less costly
for the state to choose to pay for the EUC08 benefit first as the EUC08 benefit is
100% federally financed (whereas the EB benefit is 50% state financed).60 However,
if the state opts to pay EUC08 first, individuals in the state might receive less in total
unemployment benefits if the EB program triggers off before the individuals exhaust
their EUC08 benefits. Alaska has opted to pay EB before EUC08 benefits. In
contrast, Rhode Island has opted to pay EUC08 benefits before EB.
A Second Stimulus Package?61
Some of the proposals included in earlier stimulus packages or discussed in the
course of the debate have become part of a second stimulus package. A second
stimulus plan (H.R. 3997) was proposed involving $50 to $60 billion in additional
spending on infrastructure, unemployment benefits, Medicaid and nutrition programs.
The bill passed the House on September 26 (as H.R. 7110) and included $36.9 billion
on infrastructure ($12.8 billion highway and bridge, $7.5 billion water and sewer, $5
billion Corps of Engineers); $6.5 billion in extended unemployment compensation,
and $14.5 billion in Medicaid, and $2.7 billion in food stamp and nutrition
programs. A similar bill has not been able to pass the Senate and the President has
indicated that he would veto the House bill. Earlier, a bill relating to housing relief
was passed.
The Senate budget resolution set aside $35 billion for a second package, which
is allocated between taxes and spending.62 The accompanying Committee Print
discussed the unemployment benefit extension discussed above as part of a potential
future package, along with two other spending programs: expanding food stamps and
aid to the states. It also discussed spending on ready-to-go infrastructure investments
discussed during the stimulus debate, additional spending on LIHEAP (Low Income
Energy Assistance Program) and WIC (Special Supplemental Nutrition Program for
Women Infants and Children), and the summer jobs program.
The resolution also discussed a current proposal under consideration to address
housing issues, the Foreclosure Prevention Act of 2008 (S. 2636). This proposal was
passed by the Senate as H.R. 3221 on April 10. It was not a broad stimulus package,
but was largely targeted at the housing sector. It included some regulatory and direct
spending provisions; in the latter case, primarily a $4 billion authorization for state
and local governments to redevelop abandoned and foreclosed homes.
60 Some recipients may find jobs before becoming eligible for EB. In addition, the state may
trigger off of the EB program before some recipients exhaust EUC.
61 This section was prepared by Jane Gravelle, Government and Finance Division.
62 See Concurrent Resolution of the Budget for 2009, Senate Report to Accompany
S.Con.Res. 70, Senate Print 110-039, March 2008, p. 6.

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It also included some tax reductions. The largest of these (in short run revenue
cost) was a provision similar to that enacted by the Senate for the first stimulus bill,
allowing firms to elect an extended net operating loss carryback provision and a
temporary suspension of the alternative minimum tax limitation for bonus
depreciation and small business expensing for 2008 and 2009. The net operating loss
carryback period was extended to four years. This provision cost $25 billion from
FY2008-2010, although it would raise revenues thereafter with a total cost of $6
billion over ten years. The bill also included liberalization of tax-exempt mortgage
revenue bonds, a tax credit for buyers of homes in foreclosure, a temporary deduction
for property taxes by homeowners who do not itemize (capped at $500 for single and
$1000 for couples), and an election to refund certain corporate credits in lieu of other
business provisions. There were also some limited provisions for areas still
recovering from hurricanes and from storms and tornados in Kansas. Altogether, the
package would have cost $22 billion over ten years.
The House also considered housing legislation, H.R. 5720, which had been
reported out of the Ways and Means Committee. That provision has a more limited
number of tax incentives. It includes a credit for first-time homebuyers (to be repaid
over 15 years) as well as the property tax deduction in the Senate bill (but with lower
caps of $350 and $700), along with some provisions affecting the low-income
housing credits and tax exempt bonds for housing. The bill provided revenue offsets,
however, and is therefore revenue neutral. On May 8, the House combined the tax
legislation with other housing legislation and passed its version of H.R. 3221. The
measure was delayed in the Senate, but the perceived need for a rapid legislative
response to the GSE’s problems resulted in Senate passage (where the provisions
have been negotiated with the House; the net operating loss provision was eliminated
and the tax credit is now similar to the House bill) of the bill on July 10. A final vote
was taken by the House on July 23 and by the Senate on July 26, with the bill signed
on July 30 by President Bush, who had withdrawn his veto threat (related to non-tax
provisions). The tax benefits are, however, generally offset.
There continued to be indications that interest remained in the House in a
possible second stimulus bill; House Speaker Pelosi indicated such an interest in a
press conference to mark the payment of rebates, on April 25, 2008. A letter to the
speaker by 30 members on April 17 suggested a wide variety of spending programs
including unemployment benefits, food stamps, and infrastructure. On June 12,
Senator Charles Schumer indicated that a second stimulus package should contain
provisions other than spending increases. On July 15, House Speaker Pelosi
indicated she intends to push a second stimulus bill in through Congress in
September, and that a second rebate is a possibility, but should not exclusively
dominate the package. She reiterated her plan for a second stimulus on July 31, when
the new GDP growth rates were released. The Senate is considered a $24 billion
supplemental spending bill which would include spending on infrastructure, energy
programs, and disaster aid.
In the week of September 22, following the request of the administration for
authority to purchase assets, Congressional leaders indicated that a stimulus bill,
which could include extension of unemployment benefits, infrastructure spending,
and spending on home heating oil, food stamps and health care, would also be
considered. Recent proposals of this nature proposed spending of around $50 billion.

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The bill , H.R.. 7110, passed the House on September 26, but a Senate proposal for
a $56.2 billion plan has not obtained enough votes to pass the Senate.
Congress is expected to return after the election and further consider a second
stimulus package.
Comparing the Macroeconomic
Effects of Various Proposals63
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.64
Bang for the Buck. In terms of first-order effects, any stimulus proposal that
is deficit financed would increase total spending in the economy.65 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.66 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.67
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.68 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
63 This section was prepared by Marc Labonte, Government and Finance Division.
64 For a more detailed analysis, see Congressional Budget Office, Options for Responding
to Short-Term Economic Weakness, January 2008.
65 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.
66 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).
67 For the purpose of this discussion, government transfer payments, such as entitlement
benefits, are not classified as government spending.
68 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.

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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.69 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.70
Mark Zandi of Moody’s Economy.com has estimated multiplier effects for
several different policy options, as shown in Table 7.71 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. As discussed above, a noticeable increase in consumption
spending has not yet accompanied the receipt of the rebates from the first stimulus
package.
69 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.
70 For more information, see CRS Report RS21136, Government Spending or Tax
Reduction: Which Might Add More Stimulus to the Economy?, by Marc Labonte.
71 Mark Zandi, “Washington Throws the Economy a Rope,” Dismal Scientist, Moody’s
Economy.com, January 22, 2008.

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Table 7. 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
0.3
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.
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 8, many past stimulus bills
have not become law until a recession was already underway or finished.

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Table 8. 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, although the stimulus
package was signed into law in February, the first rebate checks were not sent out
until the end of April, and the last rebate checks were not sent out until July. When
the emergency unemployment compensation (EUC08) program began in July 2008
there was about a three week lag between enactment and the first payments of the
new EUC08 benefit. 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.72
Finally, there is a behavioral lag, since time elapses before the recipient of a
transfer or tax cut increases their spending. For example, the initial reaction to the
receipt of rebate checks was a large spike in the personal saving rate (see above). 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. Although 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.
72 Transfers to state and local governments could be less stimulative than direct federal
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.

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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. Even in the absence of
a recession, it is clear that housing and financial markets have already experienced
sharp deterioration. Some economists have argued that if stimulus is not targeted at
these depressed sectors, then it will only postpone the downturn that is inevitable as
long as these sectors are ailing. (As noted above, housing legislation was recently
enacted.) For example, Goldman Sachs predicts that by the fourth quarter of 2008
the effect of the rebates on GDP will have worn off, “at which point we (fore)see
renewed stagnation in U.S. output.”73 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.
Interventions for Financial Firms and Markets74
Problems in financial markets became more acute in September 2008. Troubled
assets on bank balance sheets caused financial markets to freeze, as evidenced by
spiking spreads between U.S. Treasury securities and other interest rates.
Policymakers had been intervening for financial firms on a case-by-case basis. In the
Spring, the Federal Reserve had provided a backstop for the sale of Bear Stearns.
Financial turmoil following the decision of the government to decline such aid for
Lehman Brothers, but to assist AIG, has created dissatisfaction with the case-by-case
approach. Policymakers are now considering a plan to buy $700 billion of troubled
assets from the banking system in order to restore confidence in the financial system.
73 Ibid.
74 This section was written by Edward V. Murphy, Government and Finance Division

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Case-by-case Interventions
One factor that may have contributed to financial market instability was the
uncertainty created by case-by-case interventions in financial markets. Market
participants were unsure which institutions would qualify for government assistance.
Justifications for intervention appeared to rely on one of two arguments. First,
institutions might receive aid if they were considered too big to fail. Second,
institutions might receive aid if they perceived as too complex to unwind in
traditional bankruptcy proceedings.
Too Big to Fail. The government sponsored enterprises (GSEs), Fannie Mae
and Freddie Mac, were placed in a conservatorship.75 Arguably, the GSEs were
considered too big to fail because their combined portfolios exceeded $1 trillion. In
addition, it was believed that their role in mortgage finance was essential in the
housing market, which was a source of instability for the rest of the banking system.
The terms of this conservatorship included significant commitments of taxpayer
financing. The Treasury promised to purchase sufficient preferred stock to insure
institutional solvency. In addition, the Federal Reserve promised to directly lend
funds to the GSEs at pre-determined interest rates. While the rescue of the GSEs
would not affect smaller firms not believed to be too big to fail, the conservatorship
of Fannie Mae and Freddie Mac triggered trillions of dollars of credit derivatives that
referenced the GSEs. The potential repercussions of these credit derivatives may
have created uncertainty as to the financial health of other firms.
Too Complex to Fail. In addition to a too-big-to-fail test, some have argued
for a too-complex-to-fail test. Firms may be too complex, in this view, if an attempt
to unwind their financial commitments can cause too much uncertainty for the
balance sheets of other financial firms. Because financial firms are highly leveraged,
the failure of a major counterparty to their contracts could significantly damage their
solvency. Because credit derivatives are traded, many firms might not know how
exposed they are to particular counterparties until the derivatives are triggered.
Furthermore, there is no assurance that counterparties have adequate resources to
fulfill their commitments.
Great uncertainty surrounded the too-complex-to-fail test. The Federal
Reserve was willing to provide a financial backstop to the resolution of Bear Stearns
but declined to do so for Lehman Brothers, even though both firms participated
significantly in credit derivatives markets.76 It appeared that the too-complex-to-fail
test would not be applied in the future. However, three days later, the Federal
Reserve provided a bridge loan to insurer AIG, partly due to AIG’s positions in credit
75 CRS Report RL34661, Fannie Mae’s and Freddie Mac’s Financial Problems: Frequently
Asked Questions, by N. Eric Weiss.
76 CRS Report RL34420, Bear Stearns: Crisis and ‘Rescue’ for a Major Provider of
Mortgage-Related Products, by Gary Shorter.

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derivatives markets.77 Financial markets promptly lost confidence and policymakers
expressed dissatisfaction with a case-by-case approach.
Broad Based Intervention
Remove Illiquid Assets. Rather than treat firms on an individual basis,
policymakers could intervene with many firms at once. Treasury announced a
proposal to purchase up to $700 billion of troubled mortgage-related assets from
financial institutions which was adopted as P.L. 110-343.78 This option would
attempt to remove devalued and illiquid assets from the balance sheets of financial
firms at the same time to clean up the entire system. One advantage of this approach
is that many firms become healthy in one swoop. Financial firms will have the
ability to make new loans, not because of more capital, but because their existing
capital would not be encumbered by bad assets. This approach is similar to the
Resolution Trust Corporation (RTC) during the savings and loan crisis. The RTC
was created to resolve insolvent thrifts.
It has the advantage of dealing with large amounts of bad debts in a short period
of time. It has the disadvantage of putting the government in an awkward position.
First, the government will be the holder of vast amounts of mortgage debt. The
Treasury proposal says that assets should be resolved to protect the taxpayer;
however, this creates a conflict of interest for those policymakers that would want to
see more debt forbearance for distressed borrowers. Second, the government could
also hold vast interests in real estate. If the government sells it quickly to terminate
the issue then home prices could collapse. If the government holds on to the assets
then the government could be in the position of being a landlord for extended periods
of time. Finally, this approach may have the unintended effect of penalizing firms
that acted prudently by cleaning up the balance sheets of their competitors but not of
themselves.
Broad based injection of capital. Rather than assuming bad assets, the
government could attempt to heal bank balance sheets by injecting good assets. The
government could purchase preferred stock in financial firms, an action that has
already begun following the passage of P.L. 110-343.. The government acquired
warrants to for this purpose for Fannie Mae and Freddie Mac. This approach has
several advantages. It would leave the decisions of which assets to keep and which
to dispose of to firm managers who would presumably have greater expertise.
Second, it would not require the government to become the administrator of large
accumulations of real estate assets. Third, if the program successfully revives
financial markets then the stock will compensate the government for the cost of the
program.
77 Federal Reserve Press Release, September 16, 2008, available at
[http://www.federalreserve.gov/newsevents/press/other/20080916a.htm]
78 Treasury Press Release, “Paulson Outlines Comprehensive Approach to Mortgage
Problems,” September 22, 2008, available at [http://www.treasury.gov/news/index1.html].

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This approach is similar to the Reconstruction Finance Corporation (RFC)
during the 1930s. The RFC was created to loan funds directly to banks, railroads,
and other firms during the great depression. During the Hoover administration, the
RFC primarily intervened by providing loans to banks and trusts. The names of
recipient banks were announced which may have had the perverse effect of
identifying weak banks, which subsequently suffered runs on their deposits. FDR
made several changes, one of which allowed the Comptroller of the Currency to
reorganize national banks without a receivership. The Comptroller could then have
the RFC subscribe to new preferred shares of stock in the bank.

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