The Economic Stimulus Package: Will It Work, and for Whom?

Congress and the White House recently settled on an economic stimulus package with unusual speed, pushing the throttle to pull the economy out of a nosedive. Is this just election-year grandstanding, or does economic stimulus really work? And if it can work, what works best?

While some experts argue that priming the economy now is unnecessary, ill-timed or even counter-productive, those who support the concept applaud the design of the recently approved $168 billion package, centered on rebates of $600 to $1,200 for more than 130 million households. "They have moved remarkably quickly, so maybe this time it will, in fact, be well-timed," says Nicholas S. Souleles, finance professor at Wharton. Souleles conducted a study titled, "Household Expenditure and the Income Tax Rebates of 2001," that found a 2001 stimulus package did indeed help the economy recover from recession.

That smaller plan included permanent tax cuts that encouraged consumers to increase their spending, while the current package has only temporary features, he says. But this shortcoming may be offset by today's greater emphasis on getting money to low- and moderate-income people who are especially likely to spend it quickly. "If the new rebate is being more directed towards [financially] constrained households, that ... difference would tend to increase the total spending," he notes. More consumer spending will increase companies' sales, reducing any need for workforce cuts and encouraging growth. At least, that's the theory.

The stimulus should work, suggests Wharton finance professor Jeremy Siegel. But that's what worries him: He thinks the economy is likely to recover later in the year anyway, and that the stimulus package could combine with rising commodity prices to spur inflation. "I do think the economy is going to recover," he says. "The Fed may have to start raising interest rates in the third quarter to offset the stimulus from this package... .This just makes the job of the central bank a little harder." ...