Stimulus plans take on new urgency, scope

Concerned about a crippling global recession after last week's terrorist attacks, the U.S. and other governments have decided to throw money at the problem in extraordinary fashion, with more tax cuts for Americans likely on the way.

Fiscal restraints are being relaxed, and monetary authorities are dropping interest rates in the major industrial countries. President Bush is considering new tax cuts and perhaps new spending initiatives, along with a multibillion-dollar airline industry rescue.

Although some economists are already questioning how effective it would be, a new stimulus package will be assembled in Congress as early as this week. Under discussion are a Social Security payroll tax cut, a capital gains tax reduction, an investment tax credit and new tax incentives for depreciating business equipment.

House Speaker Dennis Hastert (R-Ill.) called a bipartisan summit with House and Senate leaders Wednesday to discuss the need for new measures to spur the economy. Also expected to take part are Federal Reserve Chairman Alan Greenspan and former Clinton administration Treasury Secretary Robert Rubin.

"These are not ordinary times," White House spokesman Ari Fleischer said Tuesday. He confirmed that Bush is looking into tax cuts as well as spending increases.

Democrats are insisting that any business tax cuts be offset by tax reductions for low- and middle-income people hit hardest by the recession, said a spokesman for Democrats on the House Ways and Means Committee. The payroll tax cut is one of the options, he said. In addition, he said, Democrats want any stimulus package to be temporary.

Consideration of such a measure shows how the terrorist strikes have changed economic policy. The U.S. and the rest of the world are entering one of the most stimulative economic eras in decades, analysts said.

On Monday, the Federal Reserve lowered interest rates for the eighth time this year, and more could be coming--particularly after new data Tuesday showed that inflation, once of primary concern to Greenspan, remained tame in August, with the consumer price index climbing a scant 0.1 percent. Britain and Japan on Tuesday joined their U.S., Canadian and European counterparts in dropping interest rates.

The U.S. and the world may be slipping into a recession that could last into 2002, but the availability of cash will not be a problem. Interest rates in the U.S. could fall low enough to spark a major new mortgage refinancing boom, said economist David Hale of Zurich Financial Services in Chicago.

History shows that with so much money suddenly gushing through the economic system, a recovery would typically take place within six to eight months, said Barry Bosworth, economist at the Brookings Institution.

By next spring, according to Bosworth and other economists, the recession should give way to a sharp snapback in economic growth--a so-called V-shaped recovery. In fact, the extent of fiscal and monetary stimulus is one of the major factors cushioning the stock market.

But some analysts say that the old policies of government economic stimulus will not have the same punch they did in the past. Brian Wesbury, chief economist at Chicago investment firm Griffin, Kubik, Stephens & Thompson, said "central banks alone cannot solve our problems," nor will tax cuts.

Wesbury said the terrorist attacks on the World Trade Center and the Pentagon have changed what he called the risk-reward ratio associated with businesses making investments, a key to an economic recovery.

"The risk of building a big building or owning an airline company have gone up," he said. "This is a direct effect of terrorism. The cost of security is going up, and productivity is going down." Solving the terrorism problem would be as much of an economic stimulus as anything, he said.

Tom Duesterberg, president of the Manufacturers Alliance and a former assistant secretary of state for economic policy, said the banking system may be awash with money to lend, but banks are tightening credit standards with the economy still in the doldrums.

As a result, lower interest rates and an increase in emergency cash, or liquidity, don't always "get quickly translated into quick economic activity or investments," he said. Duesterberg predicted a recovery next year, but only if businesses and consumers are "more confident than they are now."

As for the new stimulus package, Duesterberg said his group is urging tax incentives for depreciating business equipment on an accelerated schedule, so that companies can lower their investment costs.

But Rep. Charles Rangel of New York, the ranking Democrat on the Ways and Means Committee, has said that the GOP should not use the crisis to push across its favorite tax measures to help business. Still, the Democratic Ways and Means spokesman said a bipartisan bill is likely. .