The Stimulus Package, Pro and Con

Washington's partisan war over fiscal stimulus for the ailing economy is taking so long to resolve that it probably will come too late. Thanksgiving is the earliest any fiscal package can be expected to pass. Economists are estimating that an economic recovery will probably begin next spring, long before the full effects of any stimulus plan can be felt. The real goal now is to take out insurance against the chance that the recession turns into a rout, especially if renewed terrorism erodes confidence.

The record of fiscal stimulus is that it can stop an economy from spiraling downward but can't, by itself, create recovery. Monetary policy is a far more effective tool for generating growth. Indeed, the most important aspect of any fiscal stimulus is size--it must be big enough to brake economic decline but not too large to kick a recovery into inflationary overdrive. On this criterion, the current package of proposals gets winning grades. It appears Washington will pass a stimulus bill equal to 1.5% to 2% of gross domestic product.

There are a few turkeys among the many stimulus proposals being discussed in Congress. Helping corporations improve their balance sheets is a good policy objective. But repealing the alternative-minimum tax and refunding back payments are not. They favor a handful of capital-intensive companies, not a wide range of businesses across the economy. And they don't provide any incentive for future investments in new productivity-enhancing equipment. A big tax cut that provides for faster depreciation for new equipment is better insurance against a severe recession.

Bolstering consumer balance sheets is good insurance, too. Only 18% of the $40 billion in rebate checks mailed out this summer was actually spent, according to the New York Federal Reserve. Taxpayers are trying to get in better financial shape, deal with unpredictable events, and prepare for the recovery whenever it arrives. So are those workers who earned too little to receive tax rebates last summer. A temporary cut in payroll taxes for them is a good idea. And extending health benefits for workers who have lost jobs, another proposal, is simply the right thing to do.

These are exceptionally uncertain times. The economy can use all the insurance it can get.

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