As Congress struggles to pass a stimulus package, a debate is breaking out among economists over whether the US$75 billion to US$100 billion that the House and Senate seem willing to spend will be enough to pull the economy out of its downturn.
With a government declaration expected as early as Monday that the economy is in recession, some experts talk about needing a fiscal stimulus package that starts at US$100 billion and ranges up to U$400 billion. Such thinking is in contrast to the more common view that the current downturn will be relatively mild, requiring no more help than Congress is currently considering.
PHOTO: NY TIMES
Those pushing for greater stimulus contend that consumers and business are pulling back on too many fronts and worry that the Federal Reserve's interest rate cuts will fail to reverse the decline. The government, they say, must move quickly to make up the shortfall through a combination of public spending, subsidies and tax cuts.
"Whatever is done, has to be done fast," said Peter Bernstein, an economist and author of The Power of God, who said that Washington should inject at least US$150 billion into the economy, most of it through public spending.
Not since the early 1970s, when President Richard Nixon famously declared that everyone had become a believer in Keynesian pump-priming, has there been so much support for fiscal stimulus.
But how much? Those who say that less than US$100 billion should be plenty to do the job contend that the current downturn will be mild and will almost certainly be over by early summer. Too big an infusion, they say, would not only be unnecessary but potentially inflationary.
That is the view of US President George W. Bush's economic advisers, along with many other economists, mainly on Wall Street, who share the consensus forecast of a mild recession.
"So far, we do not see the need for much public spending at all," said R. Glenn Hubbard, chairman of President Bush's Council of Economic Advisers. "We do not think that this is a deep downturn."
The Republican-controlled House recently approved a stimulus bill that relies mainly on tax breaks to encourage private-sector spending and investment, an approach that Bush also favors, although his cost ceiling would be closer to US$75 billion, not the House's US$100 billion. The Democratic-controlled Senate, on the other hand, is considering legislation that relies much more on federal spending and subsidies than on tax benefits.
The pessimism that laces the thinking of many economists outside the consensus holds that the recessionary forces in the economy are much greater than the administration and most Wall Street forecasters realize.
"The kind of numbers we should be thinking about are certainly more than US$100 billion and probably more than US$150 billion," said Joseph E. Stiglitz, a Nobel Prize-winning economist at Columbia University who served as an economic adviser to former president Bill Clinton.
"You have to think big numbers," Stiglitz said, "unless you believe that the economy will recover quickly or you think the Fed's monetary policy will be more effective than it has been."
Consumers and business, they contend, had made the boom years possible through an unsustainable process: record borrowing and robust spending while the federal government pulled back, eventually running up large surpluses.
Making matters worse, state and municipal governments are beginning to reduce their spending as tax revenues decline in a weak economy. Every state but Vermont is required by law to balance its budget."State tax revenues fell by 3.5 percent -- US$5 billion -- in the third quarter, the first time these revenues have fallen rather than risen in the 10 years that we have collected data," said Donald Boyd, deputy director of the Center for the Study of the States in Albany, New York. "If this keeps up, the federal government will have to pump an additional US$20 billion a year into the states just to keep spending even," Boyd said. "Many states have already ordered hiring freezes, and construction projects are being postponed all over the place."
Given such problems, the only solution, according to those challenging the conventional wisdom, is for the federal government to pick up the slack, by swinging rapidly from budget surpluses to budget deficits. Support for this approach is beginning to broaden beyond its usual liberal base.
Advocates say the most important thing is to direct money to those who will spend it, mainly through richer unemployment benefits, bigger grants to states, increases in military spending and more spending on public works projects that can be undertaken quickly. School repair and highway maintenance fall into this category.
"My view is that the federal government should spend a lot of money, and it will," said Paul A. Volcker, a former chairman of the Federal Reserve, declining to say how much might be necessary to lift the economy.
"Tax cuts," he added, "do not make a lot of sense, either as tax policy or as short-run stimulus. They are doubly damned."
Volcker, like others, contends that tax cuts are too uncertain a spur. A tax break may not persuade a family to increase its spending if it is already deeply in debt, or persuade a hotel owner to hire more housekeepers if the hotel is half-empty.
Among economists sharing this view, James Galbraith of the University of Texas favors the greatest amount of spending
"Normally in wartime large-scale support to the domestic economy is not needed," Galbraith said. "But neither the US$20 billion already appropriated for the military, nor the US$20 billion allocated for relief and reconstruction in New York City, nor the US$15 billion passed out to the airlines is nearly enough to deal with the nation's economic problems."
He called for an increase in federal budget deficits from roughly zero today to the "breathtaking sum" of US$400 billion to US$600 billion a year, or 4 percent to 6 percent of gross domestic product.
"Public spending -- let me disdain the public relations term 'investment' -- has a great macroeconomic advantage over tax cuts," Galbraith said recently.
Those who favor tax cuts, however, say that permanent, across-the-board reductions in corporate and individual income taxes are a powerful incentive to spend and invest.
According to this view, when entrepreneurs are allowed to keep more of what they earn, they are quicker to invest in new equipment, even when the economy is weak. The investment generates jobs, income and a willingness to spend, especially when tax cuts allow a family to keep more of their wages.
"People can look ahead and plan," said John Makin, an economist at the American Enterprise Institute, "and if you are convinced that less tax burden is an incentive, then the economy, when it begins to recover, will have more legs."
By contrast, there is broad agreement among the advocates of spending that whatever the fiscal stimulus, it should be temporary, fading out as the economy revives. The advocates would include carefully aimed tax cuts in their plans; for example, a tax benefit for companies that step up investment, but only if they do so quickly.
"You want something that has a substantial kick in the next six months and is nearly entirely gone in 12 months," said Robert Greenstein, executive director of the Center on Budget and Policy Priorities. "You can always extend the stimulus if things go wrong."
At the top of most lists is an increase in unemployment benefits, which would add perhaps US$30 billion or more to spending in a relatively short time.
So would subsidizing health insurance premiums for unemployed workers who had lost company-paid benefits, another popular proposal among some economists and Senate Democrats.
Even conservatives like William Niskanen, chairman of the libertarian Cato Institute, who prefers across-the-board tax cuts as the best prescription for the economy, said he would support increased unemployment benefits and subsidized health insurance premiums -- if a financial package must be tried.
"If you are going to have a package," he said, "I would want across-the-board tax-rate reductions, and I would also be more than happy to increase unemployment insurance payments and pick up part of the payment for health insurance for people who are laid off and lose their coverage. That is not stimulus, that is helping people hurt by the weak economy."
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