Let’s say President Bush and Congress agree that the
needs a fiscal boost to jump-start the sluggish economy. Let’s say they even reach a consensus on what to do (fantasy, perhaps, but bear with me). Could tax cuts and direct aid get to individuals, business, and states in time to forestall a recession? U.S.
History and the current political climate suggest the answer is “no.” Too often, the cash arrives long after the economy has bottomed out. That’s not necessarily all bad, of course. Sometimes such government assistance can still shorten a recession or cushion its impact. But late is not always better than never. Pumping unneeded money into an already-rebounding economy may do little more than provide people and companies with a windfall, complicate monetary policy, and pointlessly worsen long-term deficits.
But Jared Bernstein and Larry Mishel note, while the last two recessions have been short, by the NBER's reckoning, they have been followed by long "jobless recoveries," so the stimulus may not be too late after all:
The 1990-91 recession officially ended in March 1991, but unemployment kept rising for another fifteen months, until June 1992. That was also the birth of the jobless recovery, as employment growth stagnated over this same period. But that was nothing compared to the jobless recovery following the 2001 recession: between the official trough (recession end-date) and August 2003, we lost another 1.1 million jobs (in addition to the 1.7 million lost over the recession).
Since most families depend on their paychecks, not their stock portfolios, the weak job market translated into income losses for many in the middle-class on down. In both of the last two cases, real median family incomes fell not just in the recessions, but for the first three to four years of the recoveries.
On his blog, director Peter Orzag summarizes a CBO report on stimulus options. Paul Krugman looks at what the Presidential candidates are proposing - he prefers Clinton's and Edwards' proposals over Obama's (or any of the Republicans), but Brad de Long prefers Obama's because it is simpler and quicker, though he remains unconvinced fiscal stimulus is necessary:
I don't yet believe that the case for a fiscal stimulus is strong--although I may well change my mind in a month or two. Congress and the president have a role to play in stimulus only if monetary policy has shot its bolt--which it has not--or if unemployment is rising rapidly and it is important to get cash quickly into the hands of people who will spend it and so keep the rise in unemployment from being as large. We are not there yet--at least I don't think so--but we may be there in three months.The Times reports that the man in charge of monetary policy apparently believes the Fed could stand a fiscal assist:
Ben S. Bernanke, chairman of the Federal Reserve, has told members of Congress that he can support tax cuts or spending measures to stimulate the economy, even if they temporarily increase the budget deficit, as long as the measures are quick and temporary.
But Mr. Bernanke, who is scheduled to testify before the House Budget Committee on Thursday, has also made it clear that he will refuse to comment on Republican calls to link a stimulus package with a permanent extension of President Bush’s tax cuts.
Democratic lawmakers who have spoken with Mr. Bernanke said the Fed chairman would not endorse any specific plan, but supported the general idea of propping up consumer spending and investment with temporary tax rebates or additional government spending.