Let's say President Bush and Congress agree that the U.S. needs a fiscal boost to jump-start the sluggish economy. Let's say they even reach a consensus on what to do (fantasy, perhaps, but bear with me). Could tax cuts and direct aid get to individuals, business, and states in time to forestall a recession?
History and the current political climate suggest the answer is "no." Too often, the cash arrives long after the economy has bottomed out. That's not necessarily all bad, of course. Sometimes such government assistance can still shorten a recession or cushion its impact. But late is not always better than never. Pumping unneeded money into an already-rebounding economy may do little more than provide people and companies with a windfall, complicate monetary policy, and pointlessly worsen long-term deficits.
Take the most recent recession, which ran from March to November, 2001. Congress passed a stimulus in May, and tax rebate checks were mailed from late July through September. A little late, but not bad for government work.
However, the second stage of the stimulus plan was not enacted until 2002, after the recession was actually over. Bush and Congress agreed on a plan for "bonus depreciation" which allowed businesses to take faster tax write-offs for the purchase of some equipment. That tax break increased in 2003 and did not expire until the end of 2004, three years after the recession ended.
Congressional sources and policy experts figure it could well take until May to pass a stimulus this year, as it did in 2001. Given the toxic political environment and the over-heated election season, even that may be optimistic.
To avoid this problem, former Reagan economic adviser Marty Feldstein suggests that Congress act right away, but make any stimulus contingent on the economy deteriorating to an agreed-upon level. He suggests the plan could kick in after a three-month decline in employment.
Given signs of an already-sagging economy, it is an intriguing idea. Of course, many countercyclical measures phase in automatically as the economy slows—more people get food stamps, Medicaid, or unemployment insurance as they lose their jobs. And, while not automatic, the Fed can cut interest rates rapidly as growth grinds to a halt.
However, a new study by Tax Policy Center fellows Doug Elmendorf and Jason Furman suggests that under the Feldstein trigger, stimulus would have been implemented 15 times over the past 40 years, sometimes for as brief a period as one month. Not such a great idea.
The lesson may be that there is no easy way to get the timing right, especially in a period when recessions tend to be relatively short (since 1945, only two have lasted longer than a year). So, we can leave stimulus to the Fed, or we may just have to rely on Congress and the president to do the right thing in tough economic times. And that is not exactly the sort of confidence-building environment a sluggish economy needs.
