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Prepared for Members and Committees of Congress
Recent policies have sought to contain damages spilling over from housing and financial markets
to the broader economy, including monetary policy, 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, H.R. 7110, passed the House in 2008. 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. In addition, the Fed has lent directly to financial institutions through an array of
new facilities, and the amounts of loans outstanding have risen into the hundreds of billions of
dollars. Congressional leaders and President-Elect Obama have now proposed much larger
stimulus packages, ranging from $600 to $850 billion, comprised of spending and tax cuts.
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; unemployment was
extended by an additional seven weeks on November 21, 2008.
The need for additional fiscal stimulus depends on the state of the economy. The National Bureau
of Economic Research (NBER) has declared the economy in recession since December 2007.
Growth rates, after two strong quarters, were negative in the fourth quarter of 2007, positive in
the first and second quarters of 2008, and a negative 0.5% in the third quarter. According to one
data series, employment fell in every month of 2008. The unemployment rate, which rose slightly
in the last half of 2007, declined in January and February of 2008, but began rising in March and
in November stood at 6.7%. Some forecasters believe that the ongoing financial turmoil will
result in a recession that is deeper and longer than average.
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.
The Current State of the Economy .................................................................................................. 3
Is Additional Fiscal Stimulus Needed? ..................................................................................... 6
Stimulus Proposals Enacted and Considered in 2008...................................................................... 9
Tax Rebates ..............................................................................................................................11
Preliminary Evidence on the Rebates’ Economic Effects................................................. 13
Business Tax Incentives .......................................................................................................... 17
Housing Provisions ................................................................................................................. 19
Extending Unemployment Benefits ........................................................................................ 21
Senate Committee Proposal .............................................................................................. 23
A Proposed 2009 Stimulus Package .............................................................................................. 24
Proposals Discussed in 2008................................................................................................... 24
The 2009 Proposals ................................................................................................................. 26
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 ......................................................................................................... 33
Broad Based Intervention........................................................................................................ 33
Remove Illiquid Assets ..................................................................................................... 34
Broad Based Injection of Capital...................................................................................... 34
Figure 1. Consumption, Disposable Income, and Rebate Checks, January 2007 to
September 2008.......................................................................................................................... 15
Table 1. Estimated Budget Cost of Original House Bill (H.R. 5140) .......................................... 10
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 ...................................................11
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
Author Contact Information .......................................................................................................... 36
he National Bureau of Economic Research (NBER) has declared the U.S. economy in
recession since December of 2007. Numerous actions have already been taken and
continue to be considered to contain damages spilling over from housing and financial
markets to the broader economy. These policies include traditional monetary and fiscal policy, as
well as broader interventions into the financial sector.
Earlier in 2008, 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, 2008. 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 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; $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. An extension of unemployment compensation in a
lame-duck session in November but not a general stimulus. Congressional leaders have now
proposed packages as large as $600 billion. According to news reports, President-elect Obama
plans to proposed a much larger stimulus package of around $670 to $770 billion that he expects,
with additions in Congress to amount to $850 billion, a figure much larger than proposals enacted
or considered in 2008. This package could include grants to the states, infrastructure spending,
increased transfer payments, and tax cuts.
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 market confidence is not restored and
private market spreads remain elevated, the broader economy could slow more due to difficulties
in financing consumer durables, business investment, college education, and other big ticket
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. 110343. 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
The Treasury subsequently announced that it will use the first $250 billion authorized to purchase
preferred stock in financial institutions and has now indicated it will use the funds for capital
injections, consumer credit (such as auto loans, student loans, small business loans, and credit
cards) and mortgage assistance.2 Congressional leaders urged Treasury to provide $25 billion in
aid to U.S. auto manufacturers.3 On November 10, a restructuring of government assistance to
AIG was announced which increased the amount at risk from $143.7 billion to $173.4 billion,
extended the loan length and reduced the interest rate. The Federal Reserve also announced on
October 14 that it would begin purchasing commercial paper.4 News reports also indicate the
Federal Deposit Insurance Corporations (FDIC) has a plan, supported by congressional
Democrats, to offer financial incentives to companies that agree to reduce monthly mortgage
See CRS Report RL34707, Auction Basics: Background for Assessing Proposed Treasury Purchases of MortgageBacked Securities, by D. Andrew Austin.
Testimony of Interim Assistant Secretary for Financial Stability Neel Kashkari before the House Committee on
Oversight and Government Reform, Subcommittee on Domestic Policy, November 14, 2008.
David M. Herszenhiorn, “Chances Dwindle on Bailout Plan for Automakers,” New York Times, November 14, p. A1.
Federal Reserve Board Press Release, October 14, 2008.
payments, but that this plan is opposed by the Bush administration.5 On November 23, the
government announced a plan to assist Citicorp, and on November 25 the Federal Reserve
revealed plans to purchase $200 billion in asset backed securities through the Term Asset-Backed
Securities Loan Facility (TALF); these securities are based on auto, credit card, student and small
business loans. The Federal Reserve also announced a plan to purchase $600 billion of mortgage
related securities owned or guaranteed by the housing GSEs.
Much of the intervention up to this point has been in the financial markets. However, the big three
U.S. automakers (GM, Ford, and Chrysler) have asked for $34 billion in loans to forestall
bankruptcy. The rise in gasoline prices reduced demand for profitable SUVs, and the credit
crunch and recession have further decreased consumer demand. Congressional leaders proposed
using some of the TARP funds, but the Treasury did not agree with that position, so such a loan
would require legislation or need to be considered in 2009. Some analysts believe a failure of the
auto industry could be disastrous for the Midwest and some also believe a much larger amount
will be needed. Others believe bankruptcy of the firms, which would be accompanied with
adjustments in payroll as in other bankruptcy cases, would be a better alternative.6 After Congress
did not adopt an emergency loan of $14 billion in a special post-election session in December,
2008, the Administration indicated, on December 19, that it would provide $17.4 billion from
TARP: $9.4 billion to GM and $4 million to Chrysler, with and additional $4 billion for GM if the
remaining $350 billion in TARP funds is approved.
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 fiscal stimulus enacted in 2008, 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.
The need for fiscal stimulus depends, by definition, on the state of the economy. According to the
National Bureau of Economic Research (NBER), the official arbiter of the business cycle, the
economy has been in recession since December 2007. 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.8 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
Buinyamin Appelbaum, FDIC Details Plan to Alter Mortgages, Washington Post, November 14, 2008, p. A1.
See CRS Report R40003, U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring, coordinated
by Stephen Cooney, et al. for further discussion.
This section was prepared by Marc Labonte of the Government and Finance Division.
National Bureau of Economic Research, The NBER’s Recession Dating Procedure, January 7, 2008.
declared by the NBER until November 2001, the same month in which the NBER later declared
the recession to have ended. The current recession was declared in late November of 2008.
In October 2008, a consensus among forecasters developed that the economy was in, or was
about to enter, in a recession and in November and December the forecast worsened.9 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. Revised figures show a 2.8% growth rate in the second quarter
of 2008. The Bureau of Economic Analysis’s estimate, however, indicates that real GDP
decreased by 0.5% in the third quarter. (Although negative growth is not an official prerequisite
for a recession, all historical recessions have featured it.)
After a long and unprecedented housing boom, the median house price of existing homes fell by
1.8% in 2007—possibly the first year of falling prices since the Great Depression, according to
one organization which compiles the data.10 And the decline continued in 2008 and appears to be
worsening over time. 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
Most economists believe that a housing downturn alone would not be enough to singlehandedly
cause a recession.12 But in August 2007, the housing downturn spilled over to widespread
financial turmoil.13 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 (Fed) 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, a one half of a percentage point cut on October
8, a cut of one half of a percentage point on October 29, and a cut of ¾ to 1 percentage point on
December 16. This last cut reduced the federal funds target rate to 0 to 0.25%. In addition, the
Fed has lent directly to financial institutions through an array of new facilities, and the amounts
of loans outstanding have risen into the hundreds of billions of dollars.14 A reduction in lending
Blue Chip, Economic Indicators, vol. 33, no. 10, October 10, 2008; no. 11, November 10, 2008 and no. 12, December
10, 2008. The consensus was that the recession will be deeper and last longer than the 2001 recession and perhaps
deeper and longer than any post-World-War-II contraction.
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.
For more information, see CRS Report RL34244, Would a Housing Crash Cause a Recession?, by Marc Labonte.
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.
See CRS Report RL34182, Financial Crisis? The Liquidity Crunch of August 2007, by Darryl E. Getter et al.
See CRS Report RL34427, Financial Turmoil: Federal Reserve Policy Responses, by Marc Labonte.
by financial institutions in response to uncertainty or financial losses is another channel through
which the economy could enter a recession.
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. The federal government took control of Fannie Mae and Freddie Mac in early September.
In November 2008 Treasury purchased $2.8 billion of senior preferred stock from Freddie Mac to
prevent its net worth from becoming negative. According to news reports, government officials
decided not to intervene on behalf of Lehman Brothers and Merrill Lynch;15 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.16
On September 18, Administration and Federal Reserve officials with the bipartisan support of the
Congressional leadership, announced a massive intervention in the financial markets.17 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. 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. The Federal Reserve has also announced purchases of
commercial paper, $200 billion of asset backed securities, and $600 billion of mortgage related
securities; the government has also announced a plan to assist Citigroup.
At the same time as the economy and financial sector has been grappling with the housing
downturn, energy prices had risen significantly, from $48 per barrel in January 2007 to $115
dollars on April 30, 2008 and $144 as of July 2, 2008. After that, oil prices began a downward
trend, and had fallen below $70 by October and $60 by the end of November. On December 10,
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.
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.
See CRS Report RS22957, Proposal to Allow Treasury to Buy Mortgage-Related Assets to Address Financial
Instability, by Edward V. Murphy and Baird Webel.
the price was $43. Most recessions since World War II, including the most recent, have been
preceded by an increase in energy prices.18 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. Unless energy prices begin to rise again, there is
little reason to believe they will place any further downward pressure on economic growth going
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, were positive in the first and second quarters of 2008, and negative in the third quarter of
2008. According to one data series, employment fell in the first 10 months of 2008. The
unemployment rate, which was 4.8% in February 2008, rose to 6.1% in August 2008, remained
there in September 2008, and rose again to 6.5% in October 2008 and to 6.6% in November.
Forecasters project slower growth for 2008, and appear to have reached a consensus that the U.S.
is in 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.
The economy naturally experiences a boom and bust pattern 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.19
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 deficitfinanced 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
For more information, see CRS Report RL31608, The Effects of Oil Shocks on the Economy: A Review of the
Empirical Evidence, by Marc Labonte.
For more information, see CRS Report RL34072, Economic Growth and the Business Cycle: Characteristics,
Causes, and Policy Implications, by Marc Labonte.
or increase in other taxes, the economy would not be stimulated since the deficit-increasing and
deficit-decreasing provisions would cancel each other out.
How much a larger deficit can stimulate economic activity depends on the state of the economy at
that time. When the economy is in a recession, fiscal stimulus could mitigate the decline in GDP
growth by bringing idle labor and capital resources back into use. When the economy is already
robust, 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.
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.20 To the extent that private
investment is crowded out by a larger deficit, it would reduce the future size of the economy since
the economy would operate with a smaller capital stock in the long run. In recent years, the U.S.
economy has become highly dependent on foreign capital to finance business investment and
budget deficits.21 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 dissipate the boost in spending as consumers purchase imported goods. Indeed,
conventional economic theory predicts that fiscal policy has no stimulative effect in an economy
with perfectly mobile capital flows.22 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) increased 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%.23 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.
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.
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.
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.
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.
Thus, if the slowdown proved to be short and mild, additional stimulus may not be necessary for
the economy to revive relatively quickly. If, on the other hand, the economy entered a deeper,
prolonged recession, as some economists believe to be likely, then fiscal stimulus may not be
powerful enough to avoid it. Economic forecasts are notoriously inaccurate due to the highly
complex and changing nature of the economy, so it is difficult to accurately assess how deep the
downturn will be, and how much fiscal stimulus would be an appropriate response.
The main obstacle to another round of fiscal stimulus may be the size of the current budget
deficit. Although the stimulus measures proposed are not that large in isolation, some observers
believe the deficit will already exceed $1 trillion in 2009. While there have been larger deficits in
the past relative to GDP and current government borrowing rates are extremely low (because of
the financial turmoil), there is a fear that a deficit of this size could become burdensome to
service when interest rates return to normal. A larger deficit could crowd out private investment,
act as a drag on economic growth, and increase reliance on foreign borrowing (which would
result in a larger trade deficit). By doing so, the deficit places a burden on future generations, and
could further complicate the task of coping with long-term budgetary pressures caused by the
aging of the population.24 In the highly unlikely, worst case scenario, if too much pressure is
placed on the deficit through competing policy priorities, then investors could lose faith in the
government’s ability to service the debt, and borrowing rates could spike. Many of these issues
could be avoided if the elements of the stimulus package are temporary, although there is often
later pressure to extend policies beyond their original expiration date.
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 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.25
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 2007.26 On
October 8, the interest rate was lowered to 1.5%, to 1.0% on October 29, and to 0 to 0.25% on
December 16. Lower interest rates stimulate the economy by increasing the demand for interest-
See CRS Report RL32747, The Economic Implications of the Long-Term Federal Budget Outlook, by Marc Labonte.
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.
For interest rate changes see CRS Report 98-856, Federal Reserve Interest Rate Changes: 2001-2008, by Marc
Labonte and Gail E. Makinen.
sensitive spending, which includes investment spending, residential housing, and consumer
durables such as automobiles. 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
One might take the view that 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.28
Finally, some economists argue that if the root of the problem is concentrated in the housing and
financial sectors, the economy is unlikely to return to sustainable expansion until those problems
are solved. If so, fiscal stimulus may, at most, provide a temporary boost as long as those
problems are outstanding, but cannot singlehandedly shift the economy to a sustainable path of
expansion. For example, the first stimulus package did not prevent the economy from
deteriorating in the third quarter of 2008. These problems were addressed in major housing and
financial legislation in 2008, as described above, but it remains to be seen whether they have been
Congress enacted and the President signed a stimulus package in February of 2008. 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 was 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.
For more information, see CRS Report RL30354, Monetary Policy and the Federal Reserve: Current Policy and
Conditions, by Gail E. Makinen and Marc Labonte.
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.
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.
Table 1. Estimated Budget Cost of Original
House Bill (H.R. 5140)
(billions of dollars)
Rebates for Individuals
Increase Sec. 179 Expensing and Phaseout Amounts for 2008
50% Bonus Depreciation
Joint Committee on Taxation, JCX-6-08, Jan. 28, 2008.
. Estimated Budget Cost for the Economic Stimulus Act of 2008
as Reported by the Senate Committee on Finance
(billions of dollars)
Business Stimulus Incentives
Extensions of Energy Provisions
Expansion of Qualified Mortgage Bonds
Extension of Unemployment Compensation
Joint Committee on Taxation, JCX-13-08, Jan. 30, 2008.
The final bill (see Table 2) 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.
. Estimated Budgetary Cost of the Final Bill, H.R. 5140
(billions of dollars)
Rebates for Individuals
Appropriations to Carry Out Rebates
Increase Sec. 179 Expensing and Phaseout Amounts for 2008
50% Bonus Depreciation
Joint Committee on Taxation, JCX-17-08, Feb. 8, 2008.
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 (families without tax liability receive a rebate) 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.30 The final proposal adds $6 billion in the first
year to the original House plan. The rebate is technically a credit for 2008, but payments would
be mailed in 2008 based on 2007 returns. If taxpayers qualify for a higher credit based on their
2008 circumstances, they could claim the excess on their 2008 returns.
There are five elements of the rebate proposals that are outlined in Table 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
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
This section was prepared by Jane Gravelle, Government and Finance Division.
Joint Committee on Taxation, See JCX-6-08 and JCX-9-08, http://www.house.gov/jct/.
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.
. Comparative Provisions of the Rebate
10% of the first $6,000 of taxable
income ($12,000 for couples), to
extent of tax liability (maximum
$300 rebate ($600 for couples)
available if earned income is at
Phased out at 5% of income over
$75,000 for single individuals,
$150,000 for couples
$300 per qualifying child if eligible
for any other rebate
Senate Committee Bill
Flat rebate of $500,
$1,000 for couples
Same as House
Full $500 rebate allowed if earned
income plus Social Security benefits
are at least $3,000 or taxable
income is at least $1.
Phased out at 5% of income over
$150,000 for single individuals,
$300,000 for couples.
$300 per qualifying child if eligible
for any other rebate
Expands rebates to veterans
receiving disability; disallows the
rebate to illegal immigrants.
Same as Senate,
but with House
rebate level of
Same as House
Same as Senate,
with House rebate
level of $300.
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.31 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
Senate committee bill is more progressive than the House bill (except at the top of the income
See CRS Report RL34341, Tax Rebate Refundability: Effects and Issues, by Jane G. Gravelle.
Although some rebates in the past appeared to be relatively ineffective in increasing spending,
there is some evidence the 2001 rebate was spent.32 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.33
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 September 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.34
Table 5. Receipt of Rebates by Month
(billions of dollars)
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.
See CRS Report RS22790, Tax Cuts for Short-Run Economic Stimulus: Recent Experiences, by Jane G. Gravelle.
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/
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.
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.35 Disposable income continued to fall in July and August, and
was up slightly in September. 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.36 Consumption
spending rose 0.1% in April, 0.3% in May, and fell 0.2% in June, 0.6% in July, and 0.4% in
September. 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 5% in May and 2.8% in June, suggesting that the rebates initially resulted in mostly higher
personal saving. 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 and
third quarters of 2008. GDP growth was 2.8%, while consumption grew by 1.2% 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.37
Bureau of Economic Analysis, “Income Growth Affected by Rebates,” news release, August 4, 2008.
All figures discussed in this paragraph measure the change since the previous month and have been adjusted for
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.
. Consumption, Disposable Income, and Rebate Checks,
January 2007 to September 2008
billions of $
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
The effectiveness of the rebates in boosting overall spending could in theory be reduced by
“leakages” into higher inflation, interest rates, or imports.38 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
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, Economic Growth
and the Business Cycle: Characteristics, Causes, and Policy Implications, by Marc Labonte.
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.39 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.”40
Economist Martin Feldstein argues that the rebates should be deemed a failure because they have
had very little “bang for the buck.”41 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.42
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.43
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-
Goldman Sachs, “Rebates Helped Avoid a Drop in Real Spending Last Quarter,” U.S. Daily Financial Market
Comment, August 5, 2008.
Martin Feldstein, “The Tax Rebate Was a Flop. Obama’s Stimulus Plan Won’t Work Either,” Wall Street Journal,
August 6, 2008, p. A15.
See CRS Report RS21136, Government Spending or Tax Reduction: Which Might Add More Stimulus to the
Economy?, by Marc Labonte.
Christian Broda and Jonathan Parker, “The Impact of the 2008 Tax Rebates on Consumer Spending: Preliminary
Evidence,” working paper, July 29, 2008.
durable goods. In the second quarter, non-durable consumption rose by 4% but consumption of
durable goods fell by 3% 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
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.46
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.
J. Steven Landefeld, Eugene P. Seskin, and Barbara M. Fraumeni, “Taking the Pulse of the Economy: Measuring
GDP,” Journal of Economic Perspectives, Spring 2008.
This section was prepared by Jane Gravelle, Government and Finance Division.
Revenue estimates are from the Joint Committee on Taxation, See JCX-6-08 and JCX-9-08, http://www.house.gov/
. Business Tax Provisions of the House,
Senate Committee and Final Plans
House Bill (H.R. 5140)
For 2008, allows 50% of eligible
investment (generally equipment) to
be deducted when incurred
For 2008, increases the amount of
eligible investment (generally
equipment) expensing from $128,000
to $250,000; begin phaseout at
$800,000 instead of $510,000.
Senate Committee Bill
For 2008, elect to allow 50% of investment
to be deducted equally over the first two
For 2008, elect to increase the amount of
eligible investment (generally equipment)
expensing from $128,000 to $250,000; begin
phaseout out at $800,000 instead of
Elect to increase NOL carryback from two
years to five years for losses generated from
2006 to 2008; and suspends provision that
NOL cannot exceed 90% of alternative
minimum taxable income.
Taxpayer may elect only one of the three
business benefits above;
extends through 2009 of expired or expiring
energy incentives; expands tax exempt
mortgage and rental housing bonds.
Because these benefits arise from timing, neither the initial cost nor the 10-year cost provide a
good reflection of the value to the firm. For the benefit of bonus depreciation to the firm, the
discounted values (using an 8% nominal interest rate) would be about $18 billion for the House
bill and about $14 billion for the Senate committee proposal.
Overall, it is unlikely that these provisions would provide significant short-term stimulus.
Investment incentives are attractive, if they work, because increasing investment does not trade
off short term stimulus benefits for a reduction in capital formation, as do provisions stimulating
consumption. Nevertheless, most evidence does not suggest these provisions work very well to
induce short-term spending.47 This lack of effectiveness may occur because of planning lags or
because stimulus is generally provided during economic slowdowns when excess capacity may
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.
See CRS Report RL31134, Using Business Tax Cuts to Stimulate the Economy, by Jane G. Gravelle, andCRS Report
RS22790, Tax Cuts for Short-Run Economic Stimulus: Recent Experiences, by Jane G. Gravelle.
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 2008.48 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.
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 highcost areas up to this $729,750 limit. The authority expires December 31, 2008. The FHA
permanent limit ranges from $200,160 to $362,790 in high-cost areas.50
H.R. 3221, Housing and Economic Recovery Act of 2008, as signed into law on July 30, 2008,
permanently increases 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 will be $625,000 for 2009. 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 2006.51
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.
This section was prepared by Eric Weiss, Government and Finance Division.
FHA limits are available from HUD’s website at https://entp.hud.gov/idapp/html/hicost1.cfm.
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(continued...)
The FHA high cost limits are be similar to the conforming loan limit.
Many of those supporting the increases believe they provide a needed stimulus to housing and
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
Existing credit worthiness and debt-to-income requirements apply. This prevents
anyone not current on their mortgage from refinancing.
The reduction of the 30% extra capital requirement to 20% allows 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 more than 1.50%, as compared to a “normal”
spread of approximately 0.20%. The provisions, and subsequent reduction in the spread, could:
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.53 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
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
16899, March 31, 2008.
James R. Haggerty and Damian Paletta, “Details Lacking on Mortgage-Relief Plan,” Wall Street Journal, January 26,
2008, p. A6.
Interest rates are based on mortgage rates reported by Bankrate.Com at http://www.bankrate.com/brm/graphs/
than $336,000. For example, in Barnstable, MA the limit is temporarily increased
to $462,000 in 2008, but is $417,000 in 2009.
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;54 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.55
The Senate proposal included an extension of unemployment benefits, but these provisions were
not included in the final economic stimulus legislation.57 However, an extension (Emergency
Unemployment Compensation, EUC08) 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).58 On November 21, 2008, the President signed P.L. 110449, the Unemployment Compensation Extension Act of 2008 into law. P.L. 110-449 expands the
potential duration of the EUC08 benefit from up to 13 weeks of EUC08 to a maximum of 20
weeks. It also creates a second tier of benefits for workers in states with high unemployment of
up to a maximum of an additional 13 weeks of tier II EUC08 benefits (for up to a cumulative 33
weeks of EUC08 benefits).
Originally, the intent of the Unemployment Compensation (UC) program was, among other
things, to help counter economic fluctuations such as recessions.59 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
12 U.S.C. 4562-4564 and 4566.
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-Insured
Home Loans: An Overview, by Bruce E. Foote and Katie Jones.
This section was prepared by Julie M. Whittaker, Domestic Social Policy Division.
For further discussion of proposals, see CRS Report RL34460, Current Law and Selected Proposals Extending
Unemployment Compensation, by Julie M. Whittaker.
See CRS Report RS22915, Temporary Extension of Unemployment Benefits: Emergency Unemployment Compensation
(EUC08), by Julie M. Whittaker for information on the new temporary benefit.
See, for example, President Franklin Roosevelt’s remarks at the signing of the Social Security Act
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.60
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. The EB program is currently active
solely in North Carolina (up to 13 weeks) and Rhode Island (up to 20 weeks). On December 7,
2008, the EB program will be activated on in Oregon.
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; 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.61 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.62
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.63 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.
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.
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/doc8932/01-22TestimonyEconStimulus.pdf.
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/
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.”
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.
The bill, as passed by the Senate Finance Committee on January 30, 2008, would create a new
temporary extension of UC that would entitle certain unemployed individuals to unemployment
benefits that are not available under current law. (The House bill contained no provisions relating
to unemployment benefits.) Individuals who had exhausted all rights to regular UC benefits under
the state or federal law with respect to a benefit year (excluding any benefit year that ended
before February 1, 2007) would be eligible for these additional benefits. The amount of the
benefit would be the equivalent of the individual’s weekly regular UC benefit (including any
dependents’ allowances). The temporary extension would be financed 100% by the federal
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
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
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%.
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.
Emergency Unemployment Compensation (EUC08) . The Emergency Unemployment
Compensation (EUC08) program was created by P.L. 110-252 and has been amended by P.L. 110449. This temporary unemployment insurance program provides up to 20 additional weeks of
unemployment benefits to certain workers who have exhausted their rights to regular
unemployment compensation (UC) benefits. A second tier of benefits exists in states with a total
unemployment rate of at least 6% and provides up to an additional 13 weeks of EUC08 benefits
(for a total of 33 weeks of EUC08 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 August 22,
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).65 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. Both North Carolina and Rhode Island have opted to
pay EUC08 benefits before EB.
A second stimulus proposal was discussed during 2008 and some unemployment benefits
extensions enacted, but worsening economic news has led to proposals for a much larger package
in the range of $600 to $850 billion.
Some of the proposals included in stimulus package adopted in February 2008 or discussed in the
course of the debate became part of a second stimulus package proposed but not adopted in 2008.
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);
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 EUC08.
This section was prepared by Jane Gravelle, Government and Finance Division.
$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.67 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
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
See Concurrent Resolution of the Budget for 2009, Senate Report to Accompany S.Con.Res. 70, Senate Print 110039, March 2008, p. 6.
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. 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 returned after the election to consider a second stimulus package; the unemployment
compensation extension was passed, but not the other elements.
Discussions now suggest a much larger package supported by Congressional leaders and
President Elect Obama which would build off of some of the proposals discussed for 2008 but
would also include tax cuts.
On December 15, House Speaker Pelosi suggested a $600 billion package with $400 billion of
spending and $200 billion in tax cuts as a starting point for discussion. The package would
probably include infrastructure spending, aid to the states, unemployment compensation, and food
stamps. Earlier, on December 11, Finance Committee Chairman Baucus suggested that half of an
expected $700 billion plan might be in tax cuts; he mentioned child tax credits, state and local
property tax deductions, the R&D tax credit, the marriage penalty, tax exempt bonds and energy
incentives. House Republican Leader Boehner proposed a tax package that included increases in
the child tax credit, suspending the capital gains tax on newly acquired assets, increasing
expensing, extending bonus depreciation and raising the share expensed from 50% to 75%,
extending net operating loss carrybacks to three years , lowering the corporate tax rate from 35%
to 25%, and expanding energy subsidies.
Reports on December 29 suggested President Elect Obama would propose a package of $670 bill
ion to $770 billion, but that additions in Congress might raise the total to $850 billion. The
package could include $100 billion in aid to the States to fund Medicaid, possibly with additional
grants, at least $350 billion for public works, alternative energy, health care and school
modernization, and expanding unemployment insurance and food stamp benefits. The package
would also include middle class tax cuts. While these cuts have not been specified, congressional
leaders have referred to the child credit, state and local property taxes, marriage penalties, the
R&D tax credit and tax exempt bonds.
Fiscal stimulus is only effective if the money is spent, and many economists also view fiscal
policy as less effective than monetary policy in an open economy. Tax cuts may be less effective
than spending because some of the tax cut may be saved. Tax cuts that are temporary, that appear
in a lump sum rather than in withholding, or that are aimed at higher income individuals are
thought more likely to be saved. For example, some evidence suggests that only two thirds of the
2001 tax rebate was spent.
The challenge to spending programs is that there may be a lag time for planning and
administration before the money is spent. For that reason, infrastructure spending is often
discussed in the context of “ready-to-go” projects where all of the planning is in place and the
only missing factor is funding. Some analysts suggest that aid to state and local governments may
be more quickly spent because these governments are likely to cut back on spending in
downturns, and the aid may forestall these cuts.68
Concerns have also been expressed that, the larger the package, the greater the risk that the
spending will not be effective, especially for certain types of infrastructure some economists
advocate a quick enactment of a smaller package followed by additional spending that can be
more carefully considered.69
These delays in spending are less of a concern if the downturn appears likely to be protracted or
the recovery slow.
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.71
In terms of first-order effects, any stimulus proposal that is deficit financed would increase total
spending in the economy.72 For second-order effects, different proposals could get modestly more
See CRS Report 92-937, Counter Cyclical Job Creation Programs, for a discussion of some of these issues.
See Lori Montgomery, “Obama Team Assembling $850 Billion Stimulus,” Washington Post, December 29, 2008, p.
This section was prepared by Marc Labonte, Government and Finance Division.
For a more detailed analysis, see Congressional Budget Office, Options for Responding to Short-Term Economic
Weakness, January 2008.
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.
“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.73 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.74
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.75
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, twothirds of families in the bottom 20% of the income distribution did not save at all in 2004,
whereas only one-fifth of families in the top 10% of the income distribution did not save.76
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.77
Mark Zandi of Moody’s Economy.com has estimated multiplier effects for several different policy
options, as shown in Table 7.78 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
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
For the purpose of this discussion, government transfer payments, such as entitlement benefits, are not classified as
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 increasing their other saving.
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.
For more information, see CRS Report RS21136, Government Spending or Tax Reduction: Which Might Add More
Stimulus to the Economy?, by Marc Labonte; CRS Report RL21126, Tax Cuts and Economic Stimulus: How Effective
are the Alternatives?, by Jane G. Gravelle; and CRS Report RL31134, Using Business Tax cuts to Stimulate the
Economy, by Jane G. Gravelle. Also see Fiscal Policy for the Crisis, IMF Staff Position Note, December 29, 2008,
Mark Zandi, “Washington Throws the Economy a Rope,” Dismal Scientist, Moody’s Economy.com, January 22,
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. (Note, however, that
these effects do not account for the possibility of extensive delay in direct spending taking place).
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.
Table 7. Zandi’s Estimates of the Multiplier Effect for
Various Policy Proposals
One-year change in real GDP
for a given policy change per
Payroll tax holiday
Across the board tax cut
Extend alternative minimum
Make income tax cuts expiring
in 2010 permanent
Make expiring dividend and
capital gains tax cuts permanent
Reduce corporate tax rates
Temporary increase in food
Revenue transfers to state
One-year change in real GDP
for a given policy change per
Increase infrastructure spending
Source: Mark Zandi,
Table 8.Timing of Past Recessions and Stimulus Legislation
Beginning of Recession
End of Recession
Stimulus Legislation Enacted
Apr. 1958, July 1958
May 1961, Sep. 1962
Mar. 1975, July 1976, May 1977
Jan. 1983, Mar. 1983
Dec. 1991, Apr. 1993
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.79
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
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.
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.
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.
It is clear that the slowdown has been concentrated in housing and financial markets to date.
Some economists have argued that as long as problems remain in these depressed sectors, then
generalized stimulus will only postpone the inevitable downturn. (As noted above, separate
legislation to support housing and financial markets were 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.”80 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
Problems in financial markets became more acute in September 2008. Troubled assets on bank
balance sheets, especially mortgage-backed securities (MBS), 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
This section was written by Edward V. Murphy, Government and Finance Division.
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 responded by passing a
broad plan authorizing Treasury to spend up to $700 billion (P.L. 110-343).82 Treasury is
authorized to purchase any asset that may help to restore confidence in financial markets and
stabilize credit markets.83 Although the original draft Treasury proposal focused on purchasing
illiquid mortgage-related assets from financial institutions, the plan as passed included a much
broader definition of troubled asset. This broader definition encompasses any asset, including
stock in banks, that Treasury in consultation with the Federal Reserve believes is necessary to
provide financial stability. Following passage, Treasury committed to purchase $150 billion of
preferred shares of the nine largest banks in order to inject capital into the financial system.84
Treasury has formally announced that it has abandoned plans to remove troubled MBS from bank
balance sheets, but has also announced plans to use some of the funds to intervene in consumerbased asset-backed securities (ABS) markets such as credit card receivables, auto loans, and
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.
The government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, were placed in a
conservatorship.86 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
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
Treasury Press Release, “Paulson Outlines Comprehensive Approach to Mortgage Problems,” September 22, 2008,
available at http://www.treasury.gov/news/index1.html.
CRS Report RL34730, The Emergency Economic Stabilization Act and Current Financial Turmoil: Issues and
Analysis, by Baird Webel and Edward V. Murphy.
U.S. Department of Treasury, “Tranche Report to Congress,” November 4, 2008, available at
“Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update,” Press Release,
U.S. Department of Treasury, November 12, 2008, available at http://www.treasury.gov/press/releases/hp1265.htm.
CRS Report RL34661, Fannie Mae's and Freddie Mac's Financial Problems, by N. Eric Weiss.
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.
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.87 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.88 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 derivatives markets.89 Financial markets promptly lost confidence and policymakers
expressed dissatisfaction with a case-by-case approach.
Dissatisfaction with a case-by-case approach led some policymakers to advocate for a more
systemic approach, but there was some disagreement concerning the merits of alternative
responses. Conceivably, a systemic plan could be crafted to (1) remove existing illiquid assets
from bank balance sheets,90 (2) inject capital into banks by purchasing equity shares,91 (3)
increase the liquidity of existing troubled assets by insuring them, (4) stabilize existing mortgagerelated securities markets by lowering default rates by purchasing loans likely to default, and (5)
support consumer credit markets by purchasing newly issued MBS and ABS. Treasury’s initial
draft plan focused on the first option, removing existing illiquid assets. Some Congressional
leaders argued for the second option, purchasing equity positions in banks. Others in Congress
argued for the third option, insuring existing illiquid assets. In the end, the draft plan was
amended to be general enough to encompass any of these approaches or any combination.
CRS Report RS22932, Credit Default Swaps: Frequently Asked Questions, by Edward V. Murphy.
CRS Report RL34420, Bear Stearns: Crisis and "Rescue" for a Major Provider of Mortgage-Related Products, by
Federal Reserve Press Release, September 16, 2008, available at http://www.federalreserve.gov/newsevents/press/
Treasury Secretary Paulson, “Turmoil in US Credit Markets: Recent Actions regarding Government Sponsored
Entities, Investment Banks and other Financial Institutions,” Testimony by Secretary Henry M. Paulson, Jr. before the
Senate Committee on Banking, Housing, and Urban Affairs, September 23, 2008.
CRS Report RS22962, The U.S. Financial Crisis: Lessons From Sweden, by James K. Jackson.
Although implementation of the plan has been evolving since its passage, the focus of the
Treasury action to date has been on purchasing equity in banks.
Although subsequently abandoned, the initial draft plan was to purchase up to $700 billion of
troubled mortgage-related assets from financial institutions which was adopted 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.
Problems in accurately pricing the securities could complicate this approach. On the one hand,
auctions can be designed to attempt to make sure that the government does not “overpay” for the
illiquid securities.92 On the other hand, the inclusion of mandatory warrants in EESA complicates
the calculation of the worth of the securities to the firms that hold them. A firm considering
selling some securities must not only attempt to evaluate the worth of the security, but must also
try to calculate the impact of government warrants that could dilute future shareholder positions.
Furthermore, the impact on the value of individual securities would be complicated by the
number of securities that the firm might consider to sell because the amount of warrants is not
directly related to the amount of securities sold. A firm planning to sell many securities would
discount the impact of the warrants (similar to spreading fixed costs) compared to firms that
might plan to sell fewer securities. As a result, not all securities of the same intrinsic riskweighted value would be treated the same in a potential EESA auction. In the end, Treasury
decided to abandon purchasing existing illiquid mortgage-related assets.
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
CRS Report RL34707, Auction Basics: Background for Assessing Proposed Treasury Purchases of Mortgage-Backed
Securities, by D. Andrew Austin.
that has already begun following the passage of P.L. 110-343. In a similar approach, the
government acquired warrants to for this purpose for Fannie Mae and Freddie Mac.93 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.
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.
Currently, Treasury has purchased preferred shares in large banks and has set up an application
system for smaller banks that may wish to participate. On October 28, 2008, Treasury purchased
$125 billion in preferred shares in the 9 largest banks representing approximately 55% of the
assets in the banking system.94 In return, Treasury is to receive dividends of 5% for the first five
years followed by dividends of 9% in following years, in addition to warrants for additional stock
purchases.95 The banks must pay dividends to Treasury before any dividends can be paid to junior
or equal shareholders. Smaller banks may apply for Treasury funds equal to $25 billion or 3% of
risk-weighted assets, whichever is smaller.
CRS Report RS22950, Fannie Mae and Freddie Mac in Conservatorship, by Mark Jickling.
“Remarks by Secretary Henry M. Paulson, Jr. on Financial Rescue Package and Economic Update” Press release,
U.S. Department of Treasury, November 12, 2008, available at
U.S. Department of Treasury, “Tranche Report to Congress,” November 4, 2008, available at
Jane G. Gravelle
Senior Specialist in Economic Policy
Thomas L. Hungerford
Specialist in Public Finance
Specialist in Macroeconomic Policy
N. Eric Weiss
Specialist in Financial Economics
Julie M. Whittaker
Specialist in Income Security