The Downside of a Quick Fix

What would Washington's consumer stimulus package buy? Not much more than a little time

Here's the good news: Congress and the Bush Administration are working with remarkable speed to pass a fiscal stimulus package. Tax rebate checks could start hitting mailboxes by June. Observers have been impressed with the alacrity of the political Establishment. "I don't know if it will keep the U.S. out of recession, but if there is a recession, it should shorten its stay and limit its duration," says John Lonski, chief economist of Moody's Investors Service (MCO).

The danger is that election-year pressures could tilt the package too far toward boosting consumer spending at the expense of business or public works investment. Giving cash to consumers could jolt the economy like a strong cup of coffee, then rapidly fade by late 2008. Investment in factories or bridges, by contrast, is slower-acting yet longer-lasting. Such spending tends to create jobs. That would be crucial insurance if a housing slump leads to a serious recession.

Staying Power?

The $145 billion stimulus package under negotiation in Washington is weighted toward consumption. One version would include tax rebates of $800 for an individual and $1,600 for a couple, plus some of the investment tax credits and accelerated depreciation for business that the White House wants.

Moreover, the investment incentives could still be squeezed during negotiations. Many Democrats say business investment incentives don't pack enough anti-recession punch. A Moody's study found that accelerated depreciation would be only one-fifth as effective as a refundable lump-sum tax rebate in lifting short-term growth.

The problem with putting all the money in shoppers' hands is that the boost would be fleeting. A new paper from the Brookings Institution calculates that with a completely consumption-focused stimulus, GDP would spike in mid-2008 but return to its trend line by early 2009. By then, the recent Federal Reserve rate cuts may be kicking in and providing all necessary stimulus. But there's no guarantee of that.

Cutting the Pork

Plenty of economists favor more investment. But they disagree on what kind. Most conservatives support the Bush emphasis on incentives for business spending, while liberals are more interested in public spending on infrastructure. One way to minimize political influence would be to accelerate already scheduled road projects.

By trying to engineer a brief consumption spurt, Washington could do too little for a seriously impaired economy. "You could have a bad first half of the year, get a temporary pop through the stimulus, and then go back to negative growth," warns Nigel Gault, chief U.S. economist of forecaster Global Insight. That's something a longer-term stimulus package could help guard against.

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