Stimulate the Economy, Don't Play Politics With It

You'd think that if politicians were skilled at anything, it would be at reading election returns.

But you'd never know it from the way President Bush and congressional leaders led off the debate on a short-term economic stimulus package this week, completely ignoring the unmistakable message from Iowa and New Hampshire that people are fed up with the poisonous partisanship coming out of Washington.

The president started it off with a speech in Chicago in which, after acknowledging that there is too much partisanship in the capital, he argued that the best way to keep the economy humming was to extend his tax cuts. Not only is this a non-starter with the Democratic Congress, but there isn't a credible economist who would argue that extending tax cuts set to expire in 2010 will do much to help the economy in 2008.

As if on cue, House Speaker Nancy Pelosi (D-Calif.) responded to Bush's partisan nonsense with some of her own. After declaring her willingness to "work in a bipartisan way with the president to stimulate the economy," she blasted Bush for policies that have "failed millions of working families," and then proceeded to tick off a laundry list of Democratic proposals from consumer safety to international competitiveness that have nothing to do with an economic stimulus package.

Not to be outdone, House Republican leader John Boehner of Ohio, the Attila the Hun of partisan warfare, issued his own news release criticizing the Democratic "tax-and-spend agenda." Never mind that Democrats don't even know what they'll propose.

Meanwhile, at that very moment, Barack Obama was bringing another crowd to its feet in Salem, N.H., by talking about the risk of electing the "same old people" who say "the same old things, over and over . . . hoping that the next time the results will somehow be different."

Does anyone want to connect the dots here?

Look, folks, this ought to be an easy one. Almost everyone agrees that recession is likely and a modest amount of fiscal stimulus could provide an economic cushion. It won't prevent a recession, but fiscal stimulus could be an insurance policy against the economy spiraling out of control. And it could take some of the pressure off the Federal Reserve to lower interest rates, which could stoke inflation, prompt a run on the dollar and reinflate the credit bubble that got us into this mess.

From experience, we know how much stimulus is needed -- about $125 billion, or 1 percent of GDP. And we know what programs can quickly deliver the biggest bang for the buck: extend unemployment benefits by 6 months, temporarily increase food stamp allotments and offer a flat, one-time payroll tax rebate to workers with household incomes below $100,000.

To broaden the political support for the package, you'd probably want to include money for the states, so they don't have to raise taxes or cut payrolls in the face of declining tax revenues. Budget experts agree that increasing the federal Medicaid match is a quick and efficient way to do that.

To win support of Republican business interests, it will almost certainly be necessary to throw in some tax breaks. The least objectionable is acceleration of depreciation, which doesn't reduce corporate tax payments, just delays them.

Since the housing downturn is heavily implicated in this recession, there are two other elements I'd add to the package.