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CONSUMER SPENDING IS KEY TO REVIVAL

If you are designing an "economic stimulus," you need some notion of what you're doing and why. The idea is not just to throw money at the economy on the theory that one dollar is like any other. The central purpose is to help the economy recover - something that seems to elude both Republicans and Democrats.

Even before Sept. 11, the economy had one glaring vulnerability. It was not the sagging stock market, declining corporate investment or falling exports, though all these were (and are) problems. The great danger was consumer spending. For eight years, consumers had spent beyond their means - or, more precisely, beyond the increases in their current incomes. They borrowed, sold stock or skimped on saving. By 2001, consumers' debt burden nearly matched its previous record of 14 percent.

It was this spending spree that kept the economy advancing despite faltering business investment and exports. But it could not last. The personal savings rate fell to zero. The economy had benefited from a long period of faster-than-normal consumer spending. Inevitably, there would be a period of slower spending, because consumers were overborrowed, wouldn't sell more stock or needed to replenish savings. The slowdown had started before Sept. 11; the attacks worsened it.

The inescapable conclusion is that any stimulus should concentrate its benefits on consumers. It should help them get past their spending retrenchments as quickly as possible. Consumer spending is two-thirds of gross domestic product. As it goes, so goes the rest of the economy. But this inescapable conclusion has escaped the Republican-controlled House Ways and Means Committee, which passed the first major stimulus plan. Its proposed tax cuts would go overwhelmingly to business.

Let's see. In 2002 and 2003, the bill provides $112 billion in business tax breaks. Personal tax cuts are less than half that, $49 billion. The biggest business tax break involves larger write-offs for new investments. Well, the Fed's index of industrial capacity utilization was at 75.5 in September, the lowest since June 1983. With so much surplus capacity, most companies won't add to investment until overall demand - a.k.a. consumer spending - revives.

The Ways and Means package also repeals the corporate "alternative minimum tax" and provides one-time rebates connected with past AMT payments - rebates that are an indefensible giveaway. Citizens for Tax Justice estimates that IBM would receive a $1.4 billion rebate and General Motors $833 million. What would these do for recovery? Not much. Let me repeat some previous suggestions for a stimulus plan:

Advance personal tax cuts. Changes would help the middle class. Under present law, the child tax credit is scheduled to go from $600 per child to $1,000 by 2010; the full increase could be done in the next few years. General rate cuts scheduled for 2004 to 2006 could be advanced to the next three years. With more income, consumers can do one of three things: spend it; pay down debt; or save it. The first would instantly help the economy; the other two would hasten a resumption of stronger consumer spending by improving people's finances.

Help state and local governments. This may be the next sector of the economy to tumble. Barred from deficit spending, most state and local governments trim spending when tax revenues falter, as they are now. To cushion cuts in services and jobs, Congress could temporarily revive the General Revenue Sharing program that in the 1970s provided grants to 50 states and 37,000 localities.

These proposals wouldn't permanently increase federal spending or erode the tax base. They'd simply accelerate already-passed tax cuts and provide temporary (two- to three-year) grants. Instead the "stimulus" has become a vehicle for pet agendas.

Democrats propose a hodgepodge of tax rebates for low-income families, expanded government health insurance and spending. This is income redistribution posing as stimulus. There's an almost-reflexive opposition to anything that might benefit upper-income families. But these are the people who do most of the consuming. The richest fifth of households account for 38 percent of total consumption. If they don't spend, the economy won't revive.

The ultimate failure belongs to the Bush administration. It didn't identify the bolstering of consumers as the crux of any stimulus. I suggested a few weeks ago that the White House should have forgone some cuts in top tax rates in exchange for advancing other tax cuts. But no compromise is in sight. The results, so far, are plans that will stimulate political ill will more than the economy.

Washington Post Writers Group

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