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Analysis

Fast-Moving Economy Challenged Architects of Stimulus

President Bush signs the economic stimulus bill, which will provide checks to many Americans.
President Bush signs the economic stimulus bill, which will provide checks to many Americans. (By Gerald Martineau -- The Washington Post)
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By Neil Irwin
Washington Post Staff Writer
Thursday, February 14, 2008

For months, the government has been trying to get in front of the problems facing the economy, most recently with the stimulus bill President Bush signed yesterday.

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But policymakers from the administration to Congress and the Federal Reserve are finding that the efforts that seemed proactive at the time are in fact too slow to keep up with the rapidly spreading crisis in financial markets and deterioration in the economy.

The bill Bush signed, which he called a "booster shot for our economy," will result in a tax rebate for adults with up to $75,000 in adjusted gross income or couples who make up to $150,000. Starting in late spring, the IRS will mail checks of $600 for most individuals, $1,200 for most couples and $300 for each dependent child.

When the first rumblings of a such a plan emerged in December, advocates described it as a way for the federal government to move aggressively to prevent a recession.

In the past two months, the political system moved quickly and with an uncommon degree of consensus. During that time, however, the unemployment rate spiked, job growth turned negative, and surveys indicated that big segments of the economy werecontracting.

As a result, former Treasury secretary Lawrence H. Summers said yesterday in an interview, the stimulus package is "an appropriate response rather than an energetic move ahead."

Many economists now see the stimulus measure not as an insurance policy against a recession but as a useful action to make sure that if there is a recession, it is a mild one. "It will prime the pump for consumers," said Harvard economist Martin Feldstein, who advised President Ronald Reagan. "If people respond to it, they'll start spending, it will increase confidence, and we'll be okay."

Summers called the collaboration between the White House and Congress "an example of government functioning considerably better than government has functioned on average in a long while."

The challenge facing policymakers is that the country's economic distress is being played out with unusual speed. As recently as mid-December, only a handful of indicators pointed to a significant slowing in the economy. Since late December, almost all of the indicators have.

And every time one corner of the financial markets appears to be healing, problems crop up somewhere else, often in a segment of the world financial system so obscure that even veterans on Wall Street find it unfamiliar. In November, the issue was "structured investment vehicles." In December, it was stresses in short-term money markets. Then came the possible downgrade of "monoline bond insurers" in January, and now, big problems in the market for "auction rate securities."

"The pattern is there's this new ugly thing crawling out from under the rock every month," said Ethan S. Harris, chief U.S. economist at Lehman Brothers.

The same pattern applies to the Bush administration's efforts to deal directly with the mortgage foreclosure crisis. In late August, Bush proposed changes to the Federal Housing Administration and also a change to tax law that made it easier to renegotiate a loan. At the time he drew praise for taking action to try to stem the number of foreclosures.


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