By Christopher Farrell
With a few notable exceptions, the close-knit fraternity of Wall Street analysts and economists is confident the twin levers of monetary and fiscal policy will stabilize and revive the economy sometime during the first half of 2002. Here's a representative comment from Merrill Lynch Chief Economist Bruce Steinberg's weekly commentary: "Near-term economic risks are very much on the downside, with the latest economic data uniformly awful. But the breathtaking scale of monetary and fiscal stimulus all but guarantees a powerful recovery, probably by spring."
Sounds reasonable. But one-half of that policy equation is at risk. Congress is fiddling while the economy tumbles and layoffs surge. Thanks to intransigents from both parties in Washington, the recession could get worse and last longer than the consensus prediction on Wall Street. Put it this way: A lot more people are at risk of losing their jobs than otherwise should be because Congress isn't exercising leadership when it comes to an economic stimulus package.
Let's look at some numbers. The longest economic expansion in U.S. history is officially over, as the economy declined at a 0.4% annualized rate during the third quarter. While that drop was less than expected, economists aren't taking much solace from the news, since plenty of data suggest that the consumer is hunkering down.
The growth in average consumer spending slowed to a mere 1.2% annual rate in the third quarter, less than half the pace of the previous quarter. The Conference Board's consumer confidence index plunged from 97.0 in September to 85.5 in October -- the lowest level since February, 1994. Sales of existing homes are down 11.7%. Chain-store sales are deteriorating, and malls are less crowded than before September.
The consumer kept the economy out of recession before September 11. But people are right to be wary these days, not just because of anthrax in the mail or threats of further terrorist attacks. The job market is deteriorating fast, with corporate layoff announcements spreading. The unemployment rate could easily top 6% in coming months.
TIME TO ACT.
So what's the right policy response? Now is a bad time for the Federal Reserve Board to play coy with investors, entrepreneurs, and consumers. The Fed should slash its benchmark interest rate an additional half of a percentage point -- rather than the widely expected quarter-point cut -- when the Federal Open Market Committee meets on Nov. 8.
Monetary policy shouldn't be the only game in town. Yet Congress shows no signs of getting its act together. The main legislative proposals coming out of the House and the Senate are a mishmash of spending and tax cuts. They have little to do with stimulating the economy and saving jobs, being more about ideology and political favors (see ).
For instance, far too much of the House bill is geared toward satisfying corporate interests. The bulk of tax cuts should be aimed at lower-income citizens, since they're more likely to spend than to save their income gains. Any individual tax cut should be permanent. Consumers are far from dumb, whether shopping at Home Depot or evaluating a tax cut. They'll save rather than spend a temporary tax cut or tax rebate.
The current gridlock in Washington is a textbook example of why fiscal policy over the past three decades has lost much of its allure to economists -- and Wall Street, for that matter -- as a tool for stabilizing the economy. It simply takes too long for fractious legislators to agree on a tax-and-spend package, and, worse, much of what they eventually consent to is of little economic benefit.
Let's hope Congress decides to prove to the card-carrying members of the dismal science that their view of government was far too dour. Legislators still have time to make a difference and prime the pump for an economic revival. But they need to focus on what would goose consumer spending in the short-term and leave favors for corporate special interests for a time when the country's economic health isn't at stake.
|Current House and Senate Stimulus Proposals|
|House of Representatives||Billions of dollars|
|Partial expensing of capital and software||$40|
|Ease carryback of net operating losses||$5|
|Extend expiring tax provisions||*|
|Repeal corporate AMT, refund AMT credit||$25|
|Rebate for those who missed out last summer||$14|
|Accelerate 25% tax rate due 2006 to 2002||$13|
|Increase individual AMT exemption||$1|
|Simplify individual capital gains (on 18%) rate||$1|
|Increase deduction of capital losses||$1|
None beyond those
approved last month
|*Less than $0.5 billion|
|Senate (Baucus/Byrd proposals)||Billions of dollars|
|Partial (10%) expensing of capital investments||$16|
|Ease carryback of net operating losses||$4|
|Extend expiring tax provisions||$1|
|Rebate for those who missed out last summer||$14|
|Expand unemployment compensation||$16|
|Subsidize health insurance for unemployed||$17|
|Data: UBS Warburg|
Farrell is contributing economics editor for BusinessWeek. His Sound Money radio commentaries are broadcast over National Public Radio on Saturdays in nearly 200 markets nationwide. Follow his weekly Sound Money column, only on BW Online
Edited by Beth Belton