Carper's Corner
Timely, Temporary and Targeted
February 6, 2008
Washington, D.C. -- For as long as we’ve been a country, our economy has gone through periods of expansion and contraction. Some downturns are short-lived and shallow, like the recession that occurred at the beginning of this decade. Others are severe and lengthy, like the Great Depression of the 1930s.
Economists define a recession as two consecutive quarters in which our nation’s gross domestic product (GDP) contracts. There are times when we may not know for sure that we have been in a recession until we are coming out of one; however many economists believe we may be as many as two months into a recession now.
But neither the Federal Reserve, the Bush administration nor Congress want to wait four more months for official confirmation before taking steps in an effort either to shorten an economic downturn or reduce its severity.
Many recessions last a year or less before the economy begins to recover. Having said that, if the Federal Reserve waits too long to work its interest rate magic, and if the Congress and President wait too long to use the spending and tax relief tools in our toolboxes, it’s possible their combined effect won’t kick in until later on when an economic recovery is already well underway. In fact, if used too late, monetary and fiscal policy could provide more stimulus than is needed, introducing inflationary pressures.
We’ve heard a lot from economists during the past month or two about the “Three Ts” – timely, targeted and temporary – that help ensure a successful stimulus package. Timely action is important because it decreases the likelihood that a recession will be deep or protracted. The Federal Reserve has acted with uncharacteristic speed in cutting something called the federal funds rate – the rate that banks charge for monies loaned to one another overnight – by an unprecedented 1.25 percent over an eight-day period late last month.
While the Fed was cutting rates, the Democratic-controlled House and the Bush Administration reached an agreement late last month on a package that would stimulate the economy by mailing rebates to many Americans by late spring this year, and by allowing businesses large and small to write off, or depreciate, more quickly investments that they make this year in new equipment.
For the last week or so, the focus has shifted to the Senate where the Senate Finance Committee has debated the House-passed package and a number of possible changes to it. To help us better target (the second “T”) dollars included in a stimulus package, economist Mark Zandi of Moody’s Investor Service produced a chart (below), which provides decision makers with some idea of the best “economic bang for our buck” that a dollar of fiscal stimulus buys.
As it turns out, one of the best steps we could take is to extend unemployment benefits – now 26 weeks – for an additional period of time in areas of high unemployment like Michigan and Ohio. Of equal impact would be increasing food stamps in areas of high unemployment. Zandi tells us that tax rebates and accelerated depreciation scheduled for small businesses, while helpful, are not as effective in the near term in getting money into the hands of people who will spend it right away on goods and services.
The third “T” stands for “temporary.” Fortunately, economic downturns don’t last forever. As a result, the fiscal policies that Congress and the President are discussing need to be temporary in nature to avoid further increasing our already alarming federal budget deficit.
As this week unfolds, the Senate will debate stimulus options before agreeing on a package and then entering into a weekend negotiation with the House and the Bush Administration to find a final compromise to debate and vote on by mid-February.
I’ll report back later this week or next on the progress – or lack of it – that we’re making in our nation’s capital. In the meantime, let’s keep our fingers crossed that even in the midst of a highly-charged election year, Democrats and Republicans can find common ground around a handful of steps that would do no harm to the economy and might even provide some of the boost that our economy needs in the weeks ahead.
In doing so, maybe we can even reassure Americans that their political leaders are still able to rise to the occasion when needed, set aside partisan politics and get things done for the good of our country.
Fiscal Economic Bank for the Buck
One year $ change in real GDP for a given $ reduction in federal tax revenue or increase in spending
Spending Increases
- Extending UI Benefits 1.64
- Temporary Increase in Food Stamps 1.73
- General Aid to State Governments 1.36
- Increased Infrastructure Spending 1.59
Tax Cuts
- Non-refundable lump-sum tax rebate 1.02
- Refundable lump-sum tax rebate 1.26
- Payroll tax holiday 1.29
- Across the board tax cut 1.03
- Accelerated depreciation 0.27
- Extend alternative minimum tax patch 0.48
- Bush Income Tax Cuts permanent 0.29
- Dividend and Capital Gains Tax Cuts 0.37
- Cut in Corporate Tax Rate 0.30
Source: Moody's Economy.com
