As reported by the reliably dour Nouriel Roubini, the consensus at this past weekend's American Economic Association big shindig was that a recession is now deemed all but inevitable in 2008. The question now becomes: What to do about it? In Monday's Financial Times, Lawrence Summers, the former Clinton administration treasury secretary, argues that relying on the Fed to goose the economy by lowering interest rates isn't enough. Economic stimulation via monetary policy won't do the job -- it's time to for some good old-fashioned Keynesian fiscal stimulus.
Summers proposes a package of $50 billion to $75 billion worth of temporary tax cuts and benefits goodies targeted at those likely to be worst hit by a serious economic crunch.
Taken together these criteria suggest the desirability of a program 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. Such a program could be implemented quickly and would largely benefit those most likely to be cut off from credit markets and with the most urgent need to spend. It could easily be made temporary. Ideally, further stimulus would be provided by measures to reduce future deficits and increase long-run confidence.
There is a good argument to be made that,at this juncture, artificially propping up the American economy would just postpone, once again, the long term consequences of engaging in spendthrift behavior, as both individuals and a nation. Is encouraging people to go out and spend more cash really the best medicine for a country where everybody is already up to their eyeballs in debt? But The Wall Street Journal reported on Monday that both Congress and the White House are currently mulling over the possibilities for injecting some life into the economy, though from very different perspectives. The Bush administration would like to make the tax cuts that it has already pushed through permanent. The Democratically-controlled Congress is thought likely to want to pay for any new fiscal stimulus package by rolling back those Bush tax cuts which have disproportionately favored the wealthy
That chances of anything actually happening in time to make a difference seem slim. In the best of times, attempting to smooth out the downward turn of a business cycle is a challenge, but during an election year the partisan squabbling between a Republican White House and a Democratic Congress virtually ensures nothing substantive will happen.
But that doesn't mean the question of what to do about a looming recession shouldn't be a terrific campaign issue. Already, Austin Goolsbee, a University of Chicago economist who is Barack Obama's chief economic advisor, is saying that as early as last fall, Obama had already set forth a fiscal stimulus policy appropriate to the current economic situation. A review of Obama's campaign Web site reveals that the Illinois senator has proposed a "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family, that would offset payroll taxes and "completely eliminate income taxes for 10 million Americans."
How the World Works was wondering why, in light of the recent bleak jobs report and other gloomy economic news, we weren't hearing more about Obama's plans. Then it occurred to us to look to see what Hillary Clinton and John Edwards were up to. And guess what, both of the other two leading Democratic candidates for president are also touting a middle-class tax cut. Edwards has proposed a "Get Ahead" tax credit that would "match up to $500 a year in savings for families earning up to $75,000." He would also expand tax breaks for child care and triple the Earned Income Tax Credit. Clinton, meanwhile, is pushing an almost identical proposal for "low taxes for middle class families... including child tax credit and marriage penalty relief, offering new tax cuts for health care, college and retirement, and expanding the EITC..."
I scoured in vain the blogs and news show transcripts this morning to see if, in the midst of New Hampshire primary madness, any of the candidates were making any reference to how they might go about addressing the challenge of a recession. And no wonder! There isn't a dime's worth of difference to choose from between the three leading candidates. One can safely bet that if any of them were elected, and the Democrats maintain their control of Congress, we'd be looking at a fiscal stimulus package faster than you can say "runaway inflation."
And as soon as the Democrats settle on a candidate, you can bet we'll start hearing a lot more about such a plan, if the economy continues to sour.