Amid slumping capital markets and real estate values, a jump in unemployment, and a growing chorus of economists forecasting a recession in the U.S., a consensus has rapidly developed in Washington during the first few weeks of the year that a fiscal stimulus package is in order. The watchword in Washington has been "bipartisanship," and President Bush and the congressional Democratic leadership have already made concessions. Some questions remain regarding the optimal structure and size of the package, but indications point to its enactment in a matter of weeks.

Discussion of a fiscal response to the economic slowdown began in earnest when former Treasury Secretary Lawrence Summers wrote in a Financial Times op-ed in November 2007, "Three months ago it was reasonable to expect that the sub-prime credit crisis would be a financially significant event but not one that would threaten the overall pattern of economic growth. This is still a possible outcome but no longer the preponderant probability … the odds now favor a US recession."

Summers' pessimism — or prescience — was confirmed on Jan. 4 when December 2007 employment figures showed a jump in the jobless rate from 4.7 to 5 percent and net private sector job losses. On Jan. 6, Summers wrote a follow-up op-ed, "Why America must have a fiscal stimulus": "Six weeks ago my judgment in this newspaper that recession was likely seemed extreme; it is now conventional opinion and many fear that there will be a serious recession …. Fiscal stimulus is appropriate as insurance because it is the fastest and most reliable way of encouraging short run economic growth … to be effective, fiscal stimulus must be timely, targeted, and temporary."

Summers advocated "a program of equal payments to all those paying either income or payroll taxes combined with increases in unemployment insurance benefits for the long-term unemployed and food stamp benefits [in] a $50 - $75 billon package." Ten days later, on Jan. 16, the Joint House-Senate Economic Committee held the first congressional hearing on the issue, "What Should the Federal Government do to Avoid a Recession." At the hearing, a consensus on the committee emerged that a stimulus package along the lines of Summers' recommendations to the committee should be adopted, and that "[a]s long as a fiscal stimulus program is temporary and does not create expectations of future spending or tax cuts it does not make a large economic difference whether or not it is offset by specific future fiscal actions."

The next day, Jan. 17, in testimony before the House Budget Committee, Federal Reserve Chairman Ben Bernanke offered a wholesale endorsement of Summers' suggestions, further remarking that extraneous items, such as an extension of the cuts, would vitiate the effectiveness of a stimulus package. "A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult," Bernanke said.

On Jan. 18, President Bush weighed in on the issue, saying he favored a package of one percent of gross domestic product, or between $140-150 billion. Bush's proposal reportedly featured $800 rebates for individuals and $1,600 for households, available only to income taxpayers, along with a "bonus depreciation" to allow companies to deduct 50 percent of business investments made in 2008. Surprisingly, the plan eschewed increases in unemployment insurance or food stamp benefits, a commonly cited aspect of a short-term stimulus. At the time, Bush emphasized his desire to reach bipartisan agreement on a package within short order, perhaps in time to announce it during his State of the Union Address on Jan. 28.

The willingness of both Congress and the president to arrive at a compromise on the package quickly is a radical departure from the rancorous debate, veto threats, obstruction, and delay that characterized discourse in Washington on almost every fiscal issue during 2007. One of the keys to this willingness was Bush's commitment to not seek an extension of his 2001 and 2003 tax cuts and Democrats' agreement to waive PAYGO requirements.

Some key issues remain to be resolved. But Treasury Secretary Henry Paulson has retreated from his insistence that the tax rebate go only to citizens who pay income tax, telling the U.S. Chamber of Commerce on Jan. 22 that "the package must reach a large number of citizens," indicating a willingness to extend the tax rebate to those who pay little to no income taxes. The administration is also considering an increase in the earned-income and child tax credits and is warming up to increasing spending on unemployment insurance and food stamps despite philosophical concerns.

Analysts have been quick to evaluate the efficacy of the various stimulus components under discussion, with the majority supporting widespread rebates and spending measures. According to Mark Zandi, chief economist of Moody's Economy.com, the measures that produced the biggest "bang for the buck" were increases in unemployment benefits, which produced about $1.73 in additional demand for every dollar spent. Tax rebates to all citizens generated about $1.19 for every dollar spent, while reductions in tax rates produced only 59 cents per dollar. Further evidence supporting the need to have rebates extended to all citizens was Congressional Budget Office Director Peter R. Orszag's testimony to the Senate Finance Committee on Jan. 22 that the "most effective types of fiscal stimulus … are those that direct money to people who are most likely to quickly spend the bulk of any additional funds provided to them."

One other concern is the timing of the stimulus. Even if Congress acts quickly on a package that includes some form of tax rebates, it will be difficult for the Treasury Department to swiftly send out checks to citizens. This could have a bearing on how effective the stimulus is in minimizing the economic decline.

While many of the details of the final package have yet to be worked out, it is encouraging that Congress and the president have moved with alacrity toward a consensus that now is the time for stimulus and that it should be targeted and temporary. Now, they need to decide to whom it should be targeted to and how temporary it should be.