U.S. Economic Stimulus Package to Fall Short

U.S. President George W. Bush has proposed an economic stimulus package worth up to $145 billion dollars, equivalent to one percent of U.S. GDP. Nonetheless, this news failed to assuage investor fears, which resulted in a 59.91-point (0.49%) slide in the Dow Jones industrial average Friday.

○ "Fat checks" from the government

Though short on specifics, President Bush said the package will include income tax rebates for individuals and tax incentives for businesses. He declined to give details since he must negotiate with the Democrat-led Congress on his plan.

Reports said the White House is pushing for $800 tax rebates for individuals and as much as $1,600 for households.

○ Debate over package specifics

Though American political circles agree on the necessity of the stimulus package, the White House and the Democratic Party are divided over specifics, including who should receive the tax rebates. Arriving at a consensus is likely to see a bumpy ride in Congress.

President Bush made it clear that the tax rebates will go to those paying income tax, meaning low-income earners who are exempt cannot benefit from the package. The number of households that do not pay income tax is 57 million, or 37% of the total.

This is why the Democrats say the package should offer a helping hand to not only the low-income class but also to the unemployed, together with tax rebates for the middle class.

Certain Democrats suggest that those with a yearly income of $85,000 or more should not get tax rebates, apparently seeking to help low-income households that have greatly suffered from the sluggish housing market and high oil prices.

○ Effectiveness of the package

The U.S. government laid out a similar plan in 2001 because of the sluggish economy from the dot-com crash, offering $300 in tax rebates for individuals and as much as $600 for households. As a result, two thirds of American households benefited from tax rebates.

Economists are divided over whether the stimulus package was effective back then. The Wall Street Journal said private consumption rose 0.8% in the third quarter of 2001 and 0.6% in the fourth quarter due to the tax rebates.

Private consumption, which accounts for two-thirds of the U.S. economy, forms an important economic pillar. Statistics even suggested that 500,000 new jobs were created due to the rise in private consumption occurring from the tax rebates.

Other reports said tax incentives for businesses back then added one or two percentage points to GDP growth, and created 100,000 to 200,000 new jobs.

Skeptics admit tax rebates increase consumption, but that the effect can be limited. The New York Times said only 22% of people polled in 2001 said they would use the tax rebates for consumption.

Another worry is that if tax rebates are given only to those who pay income tax, consumption will not increase as much as expected because those who are most likely to use tax rebates immediately for consumption is the low income class, who are exempt from income tax.

Other critics say the stimulus package is not the ultimate solution because it fails to tackle the sluggish housing market, the main reason behind the slumping U.S. economy.

kong@donga.com