Details of stimulus hold key to effectiveness

WASHINGTON (Reuters) - The Bush administration on Friday agreed with Congress on two key points: the U.S. economy needs a fiscal stimulus of up to $150 billion and it needs it quickly.

But details that still need to be negotiated will be critical in determining the plan's effectiveness.

Differences remain over whether to distribute the funds the stimulus package will provide to people who pay income taxes, or to reach people who may not be on the tax rolls by extending jobless benefits and raising spending for food stamps and other welfare benefits.

The outcome of that debate may well affect the degree to which the package can help stave off recession.

"Generally speaking, lower income people are going to spend the money right away. They're living paycheck to paycheck," said Bernard Baumohl, director of the Economic Outlook Group in Princeton Junction, New Jersey.

"Upper income groups give you less bang for the buck, because they'll simply save it," he said.

President George W. Bush said he wants the stimulus package to contain "broad-based tax relief that will directly affect economic growth and not the kind of spending projects that would have little immediate impact on our economy."

The rare moment of bipartisan cooperation between a Republican president and a Congress controlled by Democrats failed to impress Wall Street, which was hungry for specific details that would indicate a deal was largely agreed.

U.S. stocks closed lower, with the blue chip Dow Jones industrial average off 60 points at 12,099, its lowest closing level in 10 months.

Bush's principles for the plan contained few specific details, and some Democrats interpreted them to mean that the White House plan could exclude some 50 million people who earn too little to owe income taxes or are unemployed.

Treasury Secretary Henry Paulson said he did not want to complicate the plan with income-based benefits that could delay it. "If we can stay broad-based and simple, we'll be able to be quicker," he said.

"REAL DIFFERENCE"

Economists said a stimulus equal to about 1.0 percent of the $14 trillion U.S. economy would have a significant positive effect on growth.

"The size that's being discussed would make a real difference," said Douglas Elmendorf, a senior fellow at the Brookings Institution in Washington. "If you don't believe me, then believe (Federal Reserve Chairman) Ben Bernanke, who said so yesterday."

Bernanke told lawmakers on Thursday that a $50 billion to $150 billion stimulus would give the economy a "measurable" lift, but that it was critical any package be designed to spur spending quickly and deliver their maximum impact within the next 12 months.

A stimulus that kicks in when it is no longer needed risks overheating the economy and causing inflation, he said.

"The goal here is to maximize the amount of near-term stimulus, so not including low-income households is at odds with that objective," said Elmendorf, who is associated with former Clinton administration economic advisers in the Brookings' Hamilton Project.

Economists say the tax rebates distributed in 2001, about $300 for individuals and $600 per couple, did a good job in softening the blow of the recession that started that year and the shock of the September 11 attacks.

But even then, as much as one third of the money went straight into savings accounts, some economists said.

"It was lucky timing," said James Glassman, an economist at JPMorgan in New York. "When General Motors was advertising their 'Keep America Rolling' discounts after 9/11, people had tax rebate checks."

Tax breaks for businesses in 2002, and capital gains tax cuts in 2003, also led to big increases in consumer and business spending, although some economists argued they overheated the economy in the months following the main U.S. offensive in Iraq, as massive Federal Reserve interest rate cuts started to boost demand.

TAX CUT EXTENSION EXCLUDED

Glassman cautioned that temporary stimulus measures were likely to give the economy only a fleeting lift, and said longer-term tax policy changes were needed to change consumer behavior.

"If you can't promise to change my income permanently, I'm more likely to save the windfall. People are less likely to spend it unless they are stretched."

Bush, however, has decided to separate the issues of temporary stimulus measures from his still-cherished goal of making his 2001 and 2003 tax cuts permanent, in what officials described as an effort to strike a deal quickly with Congress.

The Bush administration has argued that making tax cuts permanent would encourage more business investment by providing greater certainty and eliminating the threat of tax rises in 2011.

"If we truly wanted to stimulate the economy, we would make the 2001 and 2003 tax cuts permanent tomorrow," said Pat Toomey, President of the conservative Club for Growth.

"Instead of doling out temporary rebates, it is essential that we increase incentives for work, savings, and investment, and you do that by lowering marginal tax rates and making those reductions permanent so people have the confidence to plan and take risk."

(Reporting by David Lawder; editing by Clive McKeef)