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By Robert J. Samuelson
Wednesday, October 24, 2001; Page A25

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. Nor is it simply to aid the slump's victims, deserving as they may be. The purpose is to help the economy recover -- something that seems to have eluded both Republicans and Democrats in the House, which is now considering various stimulus proposals.

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 early 2001, the consumer debt burden (the share of after-tax income devoted to interest and principal payment) nearly matched its previous record of just over 14 percent, according to the Federal Reserve.

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 zero rate involved some statistical quirks, but there was no doubt about the sharp decline.) The economy had benefited from a long period of faster-than-normal consumer spending. Inevitably, there would be a period of slower-than-normal 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 relevant years for recovery -- the bill provides $112 billion in business tax breaks. Personal tax cuts are less than half that, $49 billion. For each year, this would amount to less than one-quarter of one percentage point of GDP. 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 (74.8) just after the worst recession since World War II. With so much surplus capacity, most companies won't add to investment until overall demand -- aka consumer spending -- revives. Companies would get tax breaks for already-planned investments.

The Ways and Means package also repeals the corporate "alternative minimum tax" -- a technical provision whose elimination can be defended -- and provides one-time rebates connected with past payments of the alternative minimum tax, a giveaway that can't qualify as stimulus. Citizens for Tax Justice, a liberal advocacy group, estimates that IBM would receive a $1.4 billion rebate, General Motors $833 million and General Electric $671 million. What would these do for recovery? Not much.

Let me repeat some previous suggestions for a stimulus plan:

• Advance (already passed) personal tax cuts. Changes would help the middle class. 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. Similarly, Congress could quickly expand the amount of income subject to the new 10 percent tax rate as opposed to 15 percent; this change is now scheduled for 2008. 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 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 now. To cushion cuts in services and jobs, Congress could temporarily revive the General Revenue Sharing program that between 1972 and 1981 provided grants to 50 states and 37,000 localities. It could be done quickly, says Richard Nathan, the program's architect who heads the Rockefeller Institute of Government.

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. Presumably, this would assuage bond markets' fears of future budget deficits and prevent increases in long-term interest rates.

Instead "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, from schools to construction. This is income redistribution posing as stimulus. Anything that might benefit upper-income families is opposed almost reflexively. But these are the people who do most of the consuming. By one government estimate, the richest fifth of households (with average income of $110,000 in 1999) account for 38 percent of total consumption. If they don't spend, the economy won't revive.

The failure belongs to the Bush administration. It didn't identify bolstering consumers as the crux of any stimulus. This led to political failure: an inability to craft a compromise that congressional Democrats and Republicans could embrace. 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. Republicans would have gotten faster tax cuts; Democrats, some redistribution away from the top. But no compromise is in sight. The results -- so far -- are plans that will stimulate political ill will more than the economy.