The estimable Congressional Budget Office offers this paper on options for a stimulus package to revive America’s swooning economy.
The hard thing about economic policy, it’s been said, is that it’s like driving by watching the road in the rear-view mirror. The CBO report discusses the danger of this “recognition lag” leading to stimulus efforts that come too late to do short-term good but still have the potential to do long-term harm by fueling inflation, boosting deficits and so on.
Nonetheless, CBO appears to believe that the current economic weakness has been spotted in time for a properly designed stimulus to help. Lower inflation since the late ’80s, it says, has improved our ability to diagnose the economy’s condition.
Among the keys to an effective stimulus, CBO says, are:
1) That it come quickly, while it can still prevent or shorten a downturn, and
2) That it come in a form that will immediately boost economic activity. More money in the hands of consumers of modest means, who will promptly spend it, would fit the bill better than general tax cuts that would flow in large part to the affluent, it says. And business tax breaks on new investments would do more good than general business tax relief.
The political complications are obvious. The Democratic majority in Congress may see political opportunity in economic troubles, or at least hesitate to cooperate with President Bush on anything long enough to damagingly delay enactment of a stimulus.
Republicans, meanwhile, may insist on broad tax cuts or rebates that do not leave out the rich or smack of micromanaging the economy. That could also delay agreement and reduce the cost effectiveness of any stimulus that is put in place.
* Will there be a stimulus package?
* How soon?
* Will it conform to the CBO’s principles?