U.S. Weighs $180-Billion Economic Rescue Package

The White House and Congress, seeking to repair economic damage from last week’s terrorist attacks and head off a recession, are proposing as much as $180 billion in tax cuts and spending increases that could match those of the early Vietnam War buildup, according to congressional staffers and independent budget analysts.

Although key proposals could be scaled back during the usual political infighting of the legislative process, senior congressional budget staffers estimate that new tax cuts and spending programs could total from $115 billion to more than $180 billion next fiscal year alone and amount to almost 2% of the nation’s gross domestic product.

If lawmakers and the Bush administration ultimately embrace the most expensive proposals under discussion, the result would be to wipe out all of the $170-billion to $180-billion surplus Washington expected to collect in the fiscal year that begins Oct. 1, including amounts for Social Security and Medicare. By comparison, the last tax rebate, which put as much as $300 in each consumer’s pocket, cost about $38 billion.

Though details of the rescue plans are still being formulated, the sudden emergence of new tax and spending plans this large reflects the view of many lawmakers--and economists--that Washington must do almost anything it can to keep the economy from sinking in the wake of the attacks.

President Bush seemed to agree. “Our economy has slowed way down, and this is an emergency,” he told reporters Wednesday. “I’m going to work with Congress to send a clear message to America: . . . This government will respond to this emergency.”

Since the Sept. 11 attacks, the economy has begun to dramatically weaken. U.S. airlines cut their schedules by about 20% and announced more than 68,000 job cuts or layoffs. Analysts predict that as many as 100,000 are likely, plus tens of thousands more in related industries such as airplane manufacturing and travel.

Nervousness was reflected on Wall Street, where stocks plummeted again Wednesday, though the market rebounded dramatically late in the day as word spread that the U.S. was moving more military forces to the Persian Gulf.

At its lowest point, the Dow Jones industrial average was down 423 points, or 4.8%. The blue-chip index closed down 144.27 points, or 1.6%, at 8,759.13 in very heavy trading.

The estimates of the scope of the spending and tax cut package taking shape came from G. William Hoagland, Republican staff director of the Senate Budget Committee and a respected budget veteran.

“The objective is to restore economic growth by restoring Americans’ confidence, their sense of security,” Hoagland said. “It’s going to take a lot of money to do that.”

Federal Reserve Chairman Alan Greenspan sought to pour cold water on Congress’ most ambitious plans Wednesday. Greenspan told a bipartisan group of House and Senate leaders to proceed with caution in crafting an economic repair plan, saying it is still too early to assess the extent of economic damage, according to participants.

Congressional leaders appeared chastened by Greenspan’s remarks, soft-pedaling previous calls for sweeping new tax cuts in favor of more talks. Asked what the economic package would include, House Speaker J. Dennis Hastert (R-Ill.) said late Wednesday: “We haven’t made that decision yet. We’ve talked to various economists. . . . We plan to continue that discussion and come up with a prudent plan.”

Congress has already approved $40 billion for recovery and counter-terrorism measures in the wake of the attacks and is moving swiftly to add what is expected to be $17.5 billion to rescue the wounded airline industry.

Lawmakers from both parties expressed support for the rescue plan during a House Transportation Committee hearing Wednesday and said the measure could reach the full House by Friday.

Many of the tax and spending proposals now circulating in Washington appear to have only the weakest links to repairing the economic damage of the attacks, prompting some budget veterans to warn of a financial feeding frenzy.

“If many of these things become law, you’re going to see everybody wanting to come to the trough and feed,” said former Congressional Budget Director Rudolph G. Penner. Among proposals Penner singled out as especially worrisome: Republican calls for cuts in the capital gains tax on investment earnings and measures to aid the insurance and hotel and travel industries. “There is no economic justification for them,” he said.

If the White House and Congress ultimately approve a tax and spending plan of the size estimated by Hoagland, it would represent the biggest fiscal jolt Washington has delivered to the economy since the Vietnam War era.

For example, a $150-billion package, which would fall about in the middle of Hoagland’s range, would represent about 1.5% of the nation’s gross domestic product. During the first year of the major Vietnam buildup starting in 1966, the government pumped extra funds into the economy through tax cuts and defense and social spending amounting to 1.6% of GDP, according to government statistics. At the upper end of Hoagland’s range, the amounts would come close to the first years of the New Deal, when the government injected funds amounting to 2.7% of GDP.

Hoagland and Penner predicted that Congress could ultimately boost government spending by $80 billion to $100 billion beyond what was expected a little more than a week ago, before the attacks.

Hoagland said that in addition to the nearly $60 billion already in the works, the budget committee staff expects the administration to seek an extra $20 billion for defense. He said Congress itself is likely to add another $20 billion or more for such things as education, children’s health insurance and agriculture, justifying the amounts as stimulating economic recovery.

The big unknown is what the lawmakers and the administration will do on new tax cuts, one beyond those already approved as part of the president’s 10-year, $1.35-trillion tax package.

Late last week, Republicans began floating the notion of a capital gains tax cut as means of reviving the financial markets and helping to rekindle growth. Democrats countered with a proposal to provide working people a rebate on their Social Security payroll taxes.

Hoagland and Penner said each proposal would ultimately cost substantial sums in lost tax revenue. They said the political danger is that the parties would strike a compromise by embracing both.

In addition to the capital gains cut and the payroll tax rebate, lawmakers also have floated repeal of the corporate alternative minimum tax, a speed-up of corporate depreciation schedules and expansion of small business expensing. Hoagland estimated the cost at between $35 billion and $45 billion.

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Times staff writers Richard Simon in Washington and Thomas S. Mulligan and Walter Hamilton in New York contributed to this report.