Congress and President Bush have economic responsibilities

Congress and President Bush
have economic responsibilities

Yesterday’s surge on Wall Street was a welcome blip on the financial screen, but with disappointing fourth quarter reports from the retail sector looming, it is clear that one of the first things Congress and President Bush are going to have to do after returning to Washington is address the economy.

Last week’s slide on Wall Street was prompted by an increase in the unemployment rate for December from 4.7 percent to 5 percent. That was the largest increase in unemployment in a single month since the aftermath of Sept. 11, 2001.

Voters are predictably worried, and the economy has replaced the Iraq War and health care as the most pressing issue in the presidential primaries. Economists are concerned, too. A Wall Street Journal survey found top economists putting the odds of a recession this year at close to 50-50.

Congress is bound to respond with an economic stimulus package of some kind in hopes off staving off a recession or softening its impact if it comes. The Democratic leadership has already proposed to President Bush that they put partisanship aside and cooperate on a plan. Partisanship is not going to be put aside, not in an election year, but for the common good they should be able to hammer something out even if the process isn’t pretty.

The idea behind a stimulus package is simple: Quickly pump some money into the economy in hopes that consumers will resume spending and businesses investing.

Juggling act

To be effective, the stimulus has to be enacted quickly, otherwise just the prospect of a stimulus package can cause investors and consumers to hold off spending plans, increasing the danger of a recession. But hasty legislation tends to try to be all things to all people, and that’s dangerous, too.

The need for an infusion of cash into the economy must be balanced against further deficit spending, which is the last thing the economy needs.

Bush has called for extending his tax cuts as the basis of a stimulus package. That may be clever politics but poor economics since the tax cuts won’t expire until 2010 and a stimulus is needed now. And even the administration hasn’t been able to say how the nation can begin to balance its budget if all of those tax cuts were made permanent.

An effective stimulus package would include some combination of tax rebates, accelerated depreciation, extended unemployment benefits and incentives that would encourage keeping the money churning in the U.S. economy, not going overseas. Federal Reserve Chairman Ben Bernanke has already signaled he’ll support further cuts in interest rates, but the Fed can only cut so far. And it is difficult to resist pointing out that artificially low interest rates drove the economy through most of the Bush years, but also resulted in retrenchment in the housing industry, which has contributed to the likelihood of a recession.

A stimulus package has to be large enough to be effective, but not so generous that it mortgages the future. Congress and President Bush are going to have to address the immediate problem while keeping their eyes on the horizon. And to the extent that they can avoid seeking cheap political advantage, well that would be a bonus.