Friday, January 25, 2008
THERE ARE two challenges in designing a fiscal stimulus. The first is to figure out if one is necessary. Despite the violent swings in stock prices of the past three days, the actual economic data are still ambiguous as to whether the U.S. economy is already in a recession, about to enter one or, as the Congressional Budget Office forecast Wednesday, likely to skate by with slow growth. The need for stimulus is ultimately a political judgment rather than a technical one. For better or worse, both Republicans and Democrats have concluded this election year that stimulus there must be.
Which leads to the second challenge: devising measures that put cash in the hands of those who will spend it quickly, and to enact these measures before a recession has already ended, without blowing up the long-term budget deficit. The record of past stimulus efforts, most of which arrived too late, is not encouraging, and the partisan divide in Washington gave little reason to hope that policymaking would be much more precise this time. The pact announced yesterday by President Bush and House Speaker Nancy Pelosi (D-Calif.) is, in that sense, a pleasant surprise. Their negotiations swiftly arrived at a set of tax rebates that would, if promptly enacted, channel hundreds of dollars to individual low- and middle-income consumers. They also agreed on some business investment incentives that are less likely than the rebates to have a stimulative effect but are less damaging, in terms of the deficit, than other tax cuts the White House might have demanded.
To be sure, this was a compromise. Many in the Democratic coalition, especially labor unions, wish Ms. Pelosi had secured an extension in unemployment benefits and an increase in food stamps. Either action would have been a worthy step that could have quickly helped the most cash-strapped Americans. But both would have been deal-breakers for the White House. Critics of yesterday's deal overlook how far Ms. Pelosi did move the Bush administration: The president gave up extending the 2001 and 2003 tax cuts; he agreed to supply $28 billion of the proposed tax relief to lower-income individuals and households that were not included in his own proposal; and he accepted an income cap to prevent the richest Americans from getting a handout. This is what economists call a "second-best solution." But, as stimulus packages go, it's defensible.
It will take some heroics by the Internal Revenue Service to get any tax rebate checks out by June -- assuming a bill passes the Senate soon. Several Senate Democrats have said they plan to tinker with the Bush-Pelosi deal, trying to add not only unemployment insurance and food stamps but also public works spending and aid to state governments. Senators should do what they can to improve the proposal that is now on the table. But they'll have to move fast, and they'll have to remember not to make the perfect the enemy of the good.