President Bush signed a two-year, $168 billion fiscal stimulus package on Feb. 13 — the largest legislative initiative ever designed to ease an economic slowdown. Although it was passed by overwhelming margins in the House (385-35) and Senate (81-16), there was considerable debate on how to structure the package so as to maximize its efficacy and stimulative impact on the economy.

According to the Congressional Budget Office (CBO), the goal of a fiscal stimulus is to boost economic activity by increasing short-term aggregate demand. The purpose is to generate sufficient demand to engage more of the economy's existing productive capacity. This requires the plan be implemented quickly, that its benefits go to those hurt most by the economy's problems, and that these benefits not damage longer-term fiscal conditions.

A study by Economy.com's Mark Zandi, "Washington Throws the Economy a Rope," evaluates the stimulative value of most elements of the plan just signed. Zandi assigns a "bang for the buck" value for the major aspects of the package, rating them according to which generates the most immediate and stimulative spending — consumer purchases:

One of highest impact parts of the package is the individual tax rebate, returning $1.26 of increased economic activity for every $1 spent, according to Zandi. This impact is due to the structure of the rebate (it has a low income eligibility requirement; a relatively high phase-out at $75,000 for individuals; $150,000 for couples) and the likelihood the rebate will be spent quickly by most recipients. Since the majority of American households save little, have modest if any net worth, and probably have very short-term financial needs, they are likely to spend any tax benefit they receive quickly.

The business tax cuts included in the stimulus package, however, offer less stimulative value. A 2006 paper published by the Federal Reserve Board shows that the economic bang for the buck of "bonus depreciation" for businesses is very modest. Per Zandi: "… of all the tax and spending policies considered, it provides the least amount of stimulus. Such incentives offer a limited boost because many businesses have difficulty quickly adjusting long-planned capital budgets."

Weighting the stimulative, or "Zandi," value of each of the major elements of the just-passed stimulus plan according to its share of the $168 billion in spending, we can come up with an overall (rough) measure of the effectiveness of the plan as a stimulus tool.

Rebates for Individuals:
$116.7 billion — 69.5 percent of package, $1.26/Zandi value, or $147 billion

50 Percent Bonus Depreciation:
$49.5 billion — 29.4 percent of package, $0.27/Zandi value, or $13.4 billion

The all-in weighted Zandi value of the package comes out to $160.4 billion, or $7.6 billion less than the cost of the package. All other things being equal, then, the package can be expected to yield slightly less in short-term consumer purchases than it removes from the economy in the long-run in terms of additional debt, and considerably less when interest expense is factored in.

An aspect of the plan much less discussed — perhaps because it came without a price tag — was the provision raising the maximum size of mortgages that government-sponsored mortgage companies Fannie Mae and Freddie Mac can purchase and market as securities, from $417,000 to as high as $729,750 in expensive parts of the country such as New York and California. CBO estimated that the agency could back $10 billion in additional loan guarantees through 2008 with higher limits — a tiny fraction of the more than $2 trillion in new mortgage loans made last year. According to the Long Beach (CA) Press-Telegram, "the biggest winners in the economic rescue plan President Bush signed last week are likely to be Americans with more expensive homes who will be able to refinance their home loans at cheaper rates." While it costs taxpayers nothing, this aspect cannot be expected to stimulate any additional short-term consumer spending, either.

Also not included in the plan were some standard, high-leverage stimulus provisions, such as extension of federal unemployment insurance for jobless workers ($1.64 to the dollar) and an increase in food stamps ($1.73).

While it does contain some well-crafted provisions, the overall stimulus package is not optimally structured to provide the economy with a targeted short-term fiscal boost. But what it may lack in qualitative value, it may make up for in terms of sheer size. A February report in the Stanford Institute for Economic Policy Research concludes:

Without success in targeting funds to those consumers that are not able to save and need to spend all their income on consumption, the effect of tax relief will dissipate quickly… Real GDP would then increase by 0.15 percent in the first quarter and return to its original level over the following three quarters.