A Tale of Two Stimulus Bills

The stimulus bill that passed a Senate test vote is missing $80 billion in spending that is included in the House version. What gives?

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After several days of tense negotiations, the Senate's $838 billion economic stimulus bill passed a procedural vote, clearing the way for a final vote on the bill Feb. 10. If it passes, as expected, the Senate bill will be reconciled with the House version passed Jan. 28, which totaled $820 billion in spending and tax cuts.

At the core of each bill, the House and Senate versions are similar in size and scope. But the difference— about $80 billion in spending cuts in the Senate bill—is attracting sharp criticism from Democrats and from some economists who worry that provisions with the most bang for the taxpayer buck are getting short shrift.

The crux of that debate is whether spending or a combination of tax cuts and incentives is more effective at stimulating the economy. Meanwhile, there are broader questions about how effective the stimulus package can be in the face of the enormity of the economic problem.

A Necessary Starting Point

"I am not getting too excited about this [stimulus bill]," says Rajeev Dhawan, director of the Robinson College of Business at Georgia State University in Atlanta. "I don't know if this amount of money spread over two or three years can make enough of a difference."

While a number of economists have expressed similar concerns, some say the overall plan is a necessary starting point. A study released Feb. 6 by Standard & Poor's, which like BusinessWeek is a division of The McGraw-Hill Cos. (MHP), found that overall the stimulus plan will aid economic recovery. Specifically, it will likely hit President Obama's target of creating 3 million jobs by 2010. "A major stimulus initiative is the wisest course at this juncture," says David Wyss, S&P's chief economist. Still, Wyss estimates that it will take a year, if not longer, for the potential benefits of any stimulus bill to become clear.

Critics of the Senate bill are concerned that spending cuts will be displaced by consumer-oriented tax breaks for house and auto purchases. These measures, which together cost about $45 billion, could also fail to attract buyers who weren't already planning on a house or car purchase.

"A Stumble Backward"

In another departure from the House bill, the Senate bill devotes $70 billion to "patch" the alternative minimum tax, saving more than 20 million middle and upper-income taxpayers a 2009 tax increase averaging about $2,000. Economist and New York Times columnist Paul Krugman equates these tax measures with a "comforting the comfortable while afflicting the afflicted" strategy. The left-leaning Center for American Progress estimates that the Senate bill would create between 430,000 and 538,000 fewer jobs than the House bill. Michael Ettlinger, vice-president for economic policy at the center, calls the Senate bill "a stumble backward" from the $820 billion House legislation.

The House and Senate versions of the Economic Recovery and Reinvestment Act include assistance for the unemployed and lower-income individuals. Each includes about $80 billion in unemployment insurance extensions, increases, and modernization; support for training and employment services; a series of low-income housing measures; food stamps; a Low-Income Home Energy Assistance Program; and block grants for community services and development.

However the Senate bill cuts about $40 billion in education aid to states, reducing it from $79 billion to $39 billion. The House provides $19.5 billion to build and repair school and university facilities, which was stripped from the Senate bill.

Reducing the Cost of COBRA

Another difference between the bills is that the House version would establish a temporary option for states to provide Medicaid coverage to more lower-income workers who have become unemployed during the recession but who normally wouldn't qualify. (Both House and Senate packages would also reduce the cost of COBRA health coverage for unemployed workers, but most low-income workers aren't eligible for COBRA.)

The question of whether tax cuts or spending can better stimulate the economy will continue until a bill reaches President Obama's desk. But while economists and lawmakers continue that debate, another problem still hinders economic recovery: the credit crisis. Says Dhawan: "If we do not clear up the banking system, nothing else matters."

Herbst is a reporter for BusinessWeek in New York.