U.S. President Bush on Fridayy proposed an economic stimulus package, designed to keep the US economy from a undergoing prolonged downturn.

Market watchers are generally supportive of the plan, but question its efficacy.

National Bank Financial reports that while details of the proposed measures are scarce, it is known that the plan would be focused on tax rebates representing about 1% of GDP (which amounts to about US$800 per head, or US$1,600 per household).

The Securities Industry and Financial Markets Association issued a statement supporting the proposed economic stimulus package. “With our economy on the ropes, SIFMA welcomes the president’s efforts to rejuvenate the country during an economic downturn,” said Richard Hunt, senior managing director of government affairs at SIFMA. “The president has laid out a roadmap that will restore confidence in the economy and hopefully stem the tide of an approaching recession. It’s important that both the Bush Administration and Congress work in a bi-partisan fashion to assist all Americans caught up in this financial crisis.”

Hunt added that SIFMA applauds the call to make the 2001 and 2003 tax cuts permanent – especially the capital gains and dividends tax rate. “Making these tax rates permanent is a necessary component to bring certainty and stability to the markets,” he said.

More importantly, U.S. Federal Reserve Board chairman Ben Bernanke supported the idea of fiscal stimulus in his testimony to the House Budget Committee on Thursday. “Bernanke’s comments gave credence to the notion that fiscal policy can be used as an effective tool to stave off a U.S. recession and indeed there is some historical precedence for a stimulus package at least mitigating the impacts of a recession,” note TD Bank economists.

Although, NBF notes that economic theory is generally pessimistic about the efficacy of temporary fiscal measures. And, it points out, “Leverage is significantly higher now than it was in 2001 and the value of homeowner equity is actually contracting. Though a new fiscal stimulus plan is good news for the economy, it is likely to produce a different spending mix than in 2001.”

TD also says that a, “fiscal stimulus package could prove more limiting in propping up economic growth this time around.”

“For a stimulus program to work it should follow the three Ts – timely, targeted and temporary. The danger if the policy arrives too late or is too drawn out and threatens the long-term fiscal health of the government is, as Bernanke put it, a policy that ‘could be helpful in principle’ but that ‘could also prove quite counterproductive’,” TD notes.

Ultimately though, TD concludes that, “Given appropriate Fed action and a possible fiscal stimulus package to boot, even a technical recession is likely to be mild and short lived.”