Did somebody say "recession"?

The last time politicians fought over how to jump-start the economy, we all got paid. Can we now expect a check in the mail?

By Andrew Leonard

Read more: Andrew Leonard, Politics, Money, News, Economy

REUTERS/Jim Young

Federal Reserve chairman Ben Bernanke testifies Thursday before a House Budget Committee hearing.

Jan. 18, 2008 | Federal Reserve chairmen don't look kindly on legislative attempts to juice the economy by cutting taxes or boosting government spending. Their preferred strategy involves monetary policy: increasing or decreasing the amount of liquidity sloshing around the economy by raising and lowering interest rates. So when Ben Bernanke told Congress on Thursday that "fiscal action could be helpful, in principle" for addressing the current economic woes afflicting the United States, policy makers paid attention. The clamor for government to do something now to reinvigorate the economy has become deafening. If Bernanke is joining the outcry, then rebate checks from the IRS must practically be in the mail.

Economists on the right, economists on the left, and economists in the center are speaking with a surprisingly united voice about giving direct assistance to Americans about to be hit by a runaway recession. Martin Feldstein, Ronald Reagan's chief economic advisor, has declared himself in favor of a fiscal stimulus package, and so has Lawrence Summers, secretary of the treasury under Bill Clinton. There are differences -- Feldstein is against extending unemployment insurance, while Summers supports doing so -- but most economists are saying pretty much the same thing: Get some tangible cash into the hands of those Americans who need it most and would spend it quickly, boosting overall demand and giving the economy a kick in the pants. In practical terms, a rescue package could include such elements as tax rebates, an extension of unemployment benefits, and higher food-stamp allowances.

The Bush administration wants to add some goodies for its constituents: an investment tax credit for business and an agreement to make the tax cuts pushed through in 2001 and 2003 --currently set to expire in 2010 -- permanent. But such elements are not part of the prescription most economists are currently recommending.

When you're looking for short-term help, making life easier for business doesn't deliver much of a wallop to the economy. Nor does making tax cuts (which primarily benefited the well-off) permanent. Extending them will have no short-term impact on this year's economic downturn. And the failure to match those tax cuts with equivalent cuts in spending has ensured ongoing budget deficits that spell long-term trouble for the economy.

The magic words of the day are "timely, targeted, and temporary." You can read all about it in studies released over the last two weeks by the left-wing Center for Economic and Policy Research, the center-left Brookings Institution and the nonpartisan Congressional Budget Office.

If all this sounds as though it came straight out of the Democratic playbook, well, yes. For anyone who remembers the last time politicians fought over how to cope with a recession, in 2001, there's a little bit of a through-the-looking-glass feel to the sudden consensus. That year, progressive economists and Democrats argued for a tax cut targeted at the poor and working class, and bitterly opposed the centerpiece of Bush's economic agenda: tax cuts that overwhelmingly benefited the richest Americans. The Democrats won a minor victory -- the tax rebate that put checks of around $300 into the pocketbooks of most Americans was a Democratic idea, co-opted by the Bush administration -- but only at the price of a major defeat, a massive tax cut for the rich that helped wipe out Bill Clinton's budget surplus and inaugurated a new era of ongoing budget deficits.

Today, the Bush administration has been cagy about whether it's going to push for making its cherished tax cuts a part of a new fiscal stimulus package. To do so would likely kill any chance of a deal being cut with the Democratic majority in Congress. Given that majority, the Democrats are in a considerably stronger position this time around to help determine the form of any new government action. They are further aided by a growing consensus that the case for targeting a tax cut at poor and working-class Americans is smarter economics than ever. Which raises the questions: Why? What do we know now that we didn't know then?

Next page: The lesson: The poor spend it, and the rich sock it away