U.S. Economy Needs Time, Not Fiscal Stimulus

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Commentary by John M. Berry

Jan. 9 (Bloomberg) -- Suddenly the popular stimulus bandwagon of tax cuts and more spending is rolling. Better it had stayed in the garage.

The disappointing December employment report on Jan. 4 said payroll employment rose only 18,000 while the jobless rate jumped to 5 percent from 4.7 percent the month before. The news gave the beloved stimulus machine a big push.

In a presidential election year, few if any Republican and Democratic candidates and members of Congress will be able to resist hopping on board, though there will be wide disagreement about what should be done.

The politicians can point to arguments from a few well- known economists on why they should act, among them former Treasury Secretary Lawrence H. Summers, now a Harvard University professor.

``There is now a compelling case for the president and Congress to create a program of fiscal stimulus to the U.S. economy that could be signed into law in the next several months,'' Summers wrote in the Financial Times on Jan. 7.

``Fiscal stimulus is appropriate as insurance because it is the fastest and most reliable way of encouraging short run economic growth at a time when a serious recession downturn would pressure American families, exacerbate financial strains, raise protectionist pressures and hurt the global economy,'' Summers said.

He suggested some sort of tax cut or rebate ``of equal payments to all those paying either income or payroll taxes combined with increases in unemployment insurance benefits for the long-term unemployed and food stamp benefits''

No Recession

Actually, there isn't a compelling case for the $50 billion to $75 billion plan Summers proposed.

Almost no one is predicting the sort of self-reinforcing recessionary collapse in the economy that Summers envisions. Rather, most of those making recession calls, such as economist Richard Berner at Morgan Stanley, think ``it will be mild and short,'' limited to the first half of this year, he said on Jan. 7.

More importantly, economists at the Federal Reserve, in the Bush administration and their private brethren foresee a period of slow growth and no recession at all.

The Fed, with an overnight lending rate target of 4.25 percent, has plenty of room to cut beyond the 100 basis points worth of reductions made over the past four months should that be necessary.

The major source of the current economic weakness is the contraction in the housing sector, which simply has to run its course. Fiscal stimulus wouldn't do much to speed that timetable.

The Timing

Summers posed some tough standards for the stimulus, saying it must be ``timely,'' ``targeted'' and ``temporary.''

``To be worth undertaking, it must be legislated by the middle of the year and be based on changes in taxes and benefits that can be implemented almost immediately,'' Summers said.

That would be six months from now and when many forecasters expect the economy to be gathering momentum after a weak beginning to 2008. However, such timing would be consistent with numerous past attempts at fiscal stimulus, with the economic boost coming when it was no longer needed, or the legislation was abandoned when growth improved.

A tax rebate or cut certainly could be temporary, while increasing unemployment benefits or food stamps for two or three quarters, as Summers suggests, seems a peculiar thing to do.

Real Risk

The real risk to pushing for fiscal stimulus in this election year is that it might not end up being temporary. For instance, in a speech in Chicago on Jan. 7, President George W. Bush said Congress should respond to this ``time of economic uncertainty'' by making permanent several major tax cuts that expire in the next three years.

You can be sure his congressional allies would surely push hard to attach such a provision to any stimulus bill. And if that wasn't successful, some new tax cut might be enacted.

Summers briefly acknowledged the serious long-term budget problems facing the government by taking a leaf out of President Bill Clinton's 1993 policy playbook: first, a mild dose of stimulus followed by the opposite.

``Ideally, further stimulus would be provided by measures to reduce future deficits and increase long-run confidence,'' he said.

That's the issue all the candidates should be addressing in this election. The baby boomers begin to turn 62 this year, and as the Social Security Administration Web site says, ``The first baby boomer has filed for retirement on-line. You can too.''

In three years some will be 65 and sign up for Medicare.

Other Issues

Meanwhile, other costly issues are piling up, among them, finding ways to extend health insurance to the growing number of people without it; the threat of global warming; making the nation less reliant on oil from unstable foreign suppliers; the continued expenses for defense and the threat of terrorism; and the future of both Social Security and, more urgently, Medicare.

Future tax policy is inextricably linked to the spending that will be needed. Recent history suggests that neither Republicans nor Democrats are very willing to cut current programs.

If the economy shows signs of spiraling down as Summers fears, a stimulus program might be appropriate. Unless that happens, it would be better for everyone to focus on budget discipline and start planning for the critical policy debate about spending and taxes that has to take place next year.

After all, those big tax cuts are expiring in 2010 and 2011.