In 1993, Bill Clinton came into office lamenting the feeble state of the economy and insisting it needed a jump-start. A month into his term, he asked for a $30 billion fiscal stimulus package to "create jobs and guarantee a strong economy." Congress refused, the chance for fiscal stimulus was lost, and what do you know? The economy not only survived, it flourished. What followed was the longest peacetime expansion in American history.
You'd think that episode would have been a powerful lesson to our leaders: When the economy turns down, the best response may be no response. But no. After Sept. 11 dealt a heavy blow to an already weak productive sector, the demands went out from everywhere for Washington to come to the rescue. And the words "fiscal stimulus" evoke roughly the same reaction among elected officials as the phrase "free beer" prompts among rowdy undergraduates. After years of tedious fiscal discipline, Congress and the president were eager to party. Republicans saw the slump as grounds for the very tax cuts they advocated when times were good. Democrats immediately unpacked assorted spending proposals that have been collecting dust for years.
What prevented action before Congress' holiday recess was not a sudden realization that this course might turn the rapidly vanishing budget surplus into a deficit, but the inability of the two sides to agree on how to fashion the remedy. So for the moment, the economy will go unstimulated. But should more bad news emerge in the coming weeks, expect new demands from both parties to dose the economy with some powerful tonic.
Established economic theory holds that the federal government can indeed play an important role in moderating the ups and downs of the business cycle. Unemployment insurance and other income support programs have always been justified partly as a way to maintain total demand by putting dollars into the economy just as layoffs and bankruptcies are taking them out. When consumer spending or business investment flags, economic growth slows in turn, but Washington can revive it by boosting outlays or reducing taxes. Consumers who find themselves with more cash on hand are expected to spend it on goods and services, which require workers to provide; businesses use their money to purchase capital equipment, which likewise doesn't fall out of the sky.
Today, though, fiscal policy is generally thought to have far less of an impact than experts once assumed. More important is monetary policy, particularly in the era of Alan Greenspan. The Federal Reserve can act quickly to counter negative economic trends by cutting interest rates, a step that usually perks up consumer spending as well as corporate investment. Equally important, the Fed may offset the effects of loose fiscal policy by raising rates to dispel fears of looming inflation. Greenspan has not been slow to use either power.
That's just one of the problems with using budget and tax policy as a weapon against recessions. Another major one is the matter of timing. The average recession lasts 11 months, which means that by the time Congress and the president realize the need for action, the moment of real need has already passed. Clinton asked for his fiscal stimulus nearly two years after the recession of 1990-91 officially ended. The current downturn began last March, and the end may already be in sight. The index of leading economic indicators rose in both October and November, and new weekly claims for unemployment benefits have dropped by more than 100,000 since October. New home sales and consumer confidence both jumped in December. Even if a fiscal stimulus could be administered immediately, it would probably be the equivalent of throwing a swimmer a rope after he's reached the shore. But fiscal stimulus can't be administered immediately. Congress isn't due to return to work until Jan. 23, and settling on a bill acceptable to both Republicans and Democrats would take weeks, if not months.
If that's not bad enough, the remedies offered by either side in the latest congressional wrangling seem almost consciously designed not to produce an effect any time soon. The version passed by the Republican-controlled House includes special depreciation allowances for property acquired any time between Sept. 10, 2001, and Sept. 11, 2004—which gives corporations no reason to invest now rather than, say, two and a half years from now. Accelerating income tax cuts would boost take-home pay only if and when wage-earners get around to adjusting their withholding to reflect the change. Rebates for those taxpayers who didn't get one last year, also included in the House bill, wouldn't have gotten to most recipients until spring. Even then, the beneficiaries wouldn't necessarily spend it as they are supposed to; last year's rebates apparently went mostly to pay off old debts. Senate Majority Leader Tom Daschle says that the GOP proposal would cost $200 billion over the next five years—and that only $88 billion of that amount would be spent in 2002.
The Democratic approach, however, has its own imprecision. Making unemployment benefits available to some workers for 39 weeks instead of the current 26 helps only those workers who otherwise would have exhausted their benefits. A one-month payroll tax holiday, suggested by Daschle, would be broader and quicker, but as with rebates, Washington can't make taxpayers spend the money. Trying to assure medical insurance coverage for laid-off workers may be a good idea, but it has nothing to do with breathing life into the economy. Passing a bill and drafting regulations for implementing the change would probably push almost all the spending into fiscal year 2003, which doesn't begin until Oct. 1. That doesn't bother Democrats, who, like their Republican adversaries, use fiscal stimulus as an excuse for all sorts of things that they haven't been able to get before.
If fiscal stimulus were no worse than possibly useless, it might be worth trying. But it runs the real risk of bringing back the federal deficits that haunted both the economy and federal policy-making for a decade and a half. Back in August, this year's surplus was estimated at $176 billion. Today, it's hovering near zero. Any stimulus that is ineffectual or tardy will mean the return of red ink. Says Rudoph Penner, former head of the Congressional Budget Office, "It's very hard to design a fiscal stimulus that is a) effective; b) well-timed; and c) doesn't put you in a fiscal hole."
Those who think some stimulus is crucial in bad times should rest easy: There's plenty already in effect or on the way. Much of President Bush's tax cut takes effect Jan. 1, magnifying any effect last year's rebates may have had. Congress has already approved $40 billion in new spending to counteract the damage from the Sept. 11 attacks, in addition to $15 billion to rescue the airline industry. With other industries pleading unbearable hardship, there may be more bailouts to come. And lawmakers have not missed the opportunity to bring home the bacon. Sen. John McCain, R-Ariz., a longtime nemesis of pork-barrel projects, says that in recent months, such spending has run "out of control."
Right now, Congress and the administration may feel like the Woody Allen character in Sleeper, who wakes up in the 22nd century and is surprised to hear a doctor tell him that tobacco has been proved "one of the healthiest things for your body." Having finally overcome the reckless budgetary habits of the past and accustomed the American people to living within their means, our leaders are now on the verge of an unnecessary lapse that would undo those achievements. What they portray as a fiscal stimulus is more likely to end up a fiscal burden.