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Originally published Friday, February 13, 2009 at 12:00 AM

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Stimulus legislation: Not the right recipe to get U.S. cooking again?

The compromise economic-stimulus plan agreed to by House and Senate negotiators is short on incentives to persuade consumers to spend again and long on social goals that won't stimulate economic activity, according to a range of respected economists.

McClatchy Newspapers

Votes possible today

Lawmakers spent much of Thursday hammering out final details of the economic- stimulus bill. Among last-minute changes: a slight expansion of a provision that would let companies claim refunds by applying current losses to prior profitable years and a $3.2 billion tax break that would allow General Motors to claim refunds for taxes paid in earlier, profitable years. House Majority Leader Steny Hoyer of Maryland scheduled a vote for this afternoon. Senate leaders also were hoping to vote today, but the timing was uncertain.

The New York Times

WASHINGTON — The compromise economic-stimulus plan agreed to by House and Senate negotiators is short on incentives to persuade consumers to spend again and long on social goals that won't stimulate economic activity, according to a range of respected economists.

"I think (doing) nothing would have been better," said Ed Yardeni, an investment analyst who usually is an optimist. He said the $789 billion plan fails to provide the right incentives to spur spending.

"It's unfocused. That is my problem. It is a lot of money for a lot of nickel-and-dime programs. I would have rather had a lot of money for (promoting purchase of) housing and autos. ... Most of this plan is really, I think, aimed at stabilizing the situation and helping people get through the recession, rather than getting us out of the recession. They are actually providing less short-term stimulus by cutting back, from what I understand, some of the tax credits."

House and Senate negotiators this week narrowed the differences between their competing stimulus plans. In doing so, they scrapped a large tax credit for buying automobiles that would have had positive ripple effects across the manufacturing sector. Instead, they settled on letting purchasers of new vehicles deduct from their federal taxes the state and local sales taxes on the cars they buy.

The exception to this is for buyers of plug-in hybrids, vehicles that run off a battery that can be charged at home or in the office. Buyers of these vehicles, available in limited supply, could receive a tax credit of up to $9,100.

A Republican-backed proposal that would have provided a $15,000 tax credit to first-time homebuyers also was scaled back substantially. Instead, the compromise provides first-time homebuyers a tax credit of up to $8,000, and it doesn't have to be repaid over the life of the mortgage. Incentives in place offer buyers a $7,500 credit that must be repaid, so the bill is an improvement, but short of what many economists think is necessary.

Another reason some analysts frown on the stimulus package is the social spending on things such as the Head Start program for disadvantaged children and aid to NASA for climate-change research. Neither is aimed at delivering short-term boosts to economic activity.

"All this is 25 years of government expansion jammed into one bill and sold as stimulus," said Brian Riedl, director of budget analysis for the Heritage Foundation, a conservative policy-research group.

Others shared a similarly dim view. In a brief on the stimulus compromise, William Galston, a senior fellow at the center-left Brookings Institution and a former Clinton White House adviser, warned Thursday that a bank-rescue plan being finalized will make the $789 billion look like "pocket change."

"While the stimulus bill is a necessary condition for economic stabilization and recovery, it is hardly sufficient," Galston wrote. "As the lesson of Japan in the 1990s shows, fiscal stimulus without financial rescue yields stagnation — at best."

Galston further wrote: "... Serious observers believe that recovery cannot begin until we acknowledge that losses in the financial system amount to some trillions of dollars, rendering many institutions insolvent. The temptation will be to muddle along, hoping that these institutions can gradually regain strength without putting massive amounts of taxpayers' money at risk. If we go down that road, we are likely to end up with zombie banks whose balance sheets are riddled with near-worthless investments — banks that cannot lend to creditworthy customers and who cannot trust one another."

Doing nothing isn't an option, however.

"Something is better than nothing, and bigger was better than smaller in terms of the stimulus needed," said Chris Varvares, president of prominent forecaster Macroeconomic Advisers in St. Louis. "The economy needs a fiscal jolt."

Even some proponents of a stimulus are disappointed. Harvard University economist Martin Feldstein, a former adviser to President Reagan, was an early supporter. He said government is the only engine left to spark economic activity, but he said the compromise falls short of what's needed.

"If the choice is between the current bill and an improved bill, I would say wait and improve the bill," Feldstein told CNBC on Wednesday. "I am disappointed with the structure of this bill."

Like Yardeni and other analysts, Feldstein wanted more incentives for consumers to make big purchases that have ripple effects across the economy. When a car is purchased, it helps the carmaker and its suppliers, the trucking companies and railroads that transport cars, the states that issue license plates and so on.

Still, could this stimulus put the U.S. economy back on its feet?

By itself, probably not, economists agreed. The stimulus plan, however, is supposed to work in tandem with new efforts by the Treasury and the Federal Reserve to rid banks of distressed assets, and with other federal efforts to halt mortgage delinquencies and foreclosures. Much will depend on details of both federal attack plans, which the Obama administration promises are coming soon.

There's also the problem of time. Much of the stimulus is to be spread over two years or longer — and 2009 looks increasingly bleak.

That means this is essentially a lost year for the economy. Most scenarios envision the economy picking up again next year.

The president of the U.S. Chamber of Commerce, in a speech in Detroit on Thursday, tried to put a brave face on the coming year. Thomas Donohue acknowledged the stimulus bill doesn't include some of the tax-relief measures most wanted by big business but promised the chamber's support.

"The bottom line is that at the end of the day, we're going to support the legislation," Donohue said. "Why? Because with the markets functioning so poorly, the government is the only game in town capable of jump-starting the economy."

Copyright © 2009 The Seattle Times Company

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