To Blunt a Recession

Friday, January 11, 2008

AN ALARMING number of Americans got pink slips for Christmas. Unemployment jumped from 4.7 percent to 5 percent in December, the strongest sign yet that the economy is slowing and could soon slip into reverse. Goldman Sachs predicts a recession this year, echoing earlier assessments by President Bill Clinton's Treasury secretary, Lawrence Summers, and President Ronald Reagan's top economic adviser, Martin Feldstein.

The Federal Reserve Board has already cut interest rates to prop up the economy, and Chairman Ben S. Bernanke said yesterday that it is "ready to take substantive additional action as needed." The question is what, if anything, Congress and the president should do on top of the Fed's efforts. Some economists who are predicting a recession, including Mr. Feldstein and Mr. Summers, are also calling for tax cuts and spending increases to give the economy a short-term fiscal stimulus. The Bush administration is said to be developing ideas for such a package.

In an election year, the political pressure for a stimulus is bound to be especially strong. And an appropriate fiscal stimulus could take some of the burden of recession-fighting off the Fed and the already weakening dollar. But first, a few words of caution: There is not yet any proof of a recession, defined as two straight quarters of negative growth; Mr. Bernanke said yesterday that the economy probably grew "at a moderate pace" in the past three months. Nor is there any consensus that a recession, if one comes, will be severe; Goldman Sachs thinks it's likely to be short and mild. The slowdown is being counteracted, to some extent, by "automatic stabilizers" such as increased spending on unemployment benefits and lower tax receipts. As a result, the fourth-quarter 2007 federal deficit grew by $27 billion over the same period a year ago, according to the Congressional Budget Office. And as Mr. Bernanke noted, the Fed has hardly exhausted its rate-cutting capacity.

Any stimulus package would have to kick in just when economic data confirmed a recession and would have to deliver dollars quickly to those people most likely to spend them on new goods and services. It would also have to be offset by future spending cuts or revenue increases to avoid adding to the long-term deficit. Congress does not usually work with this degree of precision, which is why it's preferable to rely on the fast-acting Fed and its independent experts. Politicians hardly need an excuse for pork and wasteful tax breaks, but recession fighting is a perfect one. The Bush administration might well use the gloomy economic forecasts as yet another rationale for making its 2001 tax cuts, which expire in 2010, permanent. Mr. Feldstein suggests that Congress enact a quick tax rebate or other tax cut for households to go into effect only if three straight months of shrinking employment confirmed that it was needed. It's a clever and potentially effective idea whose only flaw is that it counts on Congress to show patience and restraint.

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