At the Brookings Institution this morning, a standing-room only crowd heard five economic heavyweights debate what may become the central domestic policy issue of 2008. Do we need fiscal stimulus to keep the nation out of recession, and, if we do, what should it look like?
The group agreed, more or less, that we do need a quick, temporary, fiscal boost of roughly $100 billion and that it should be built around both a tax rebate and traditional countercyclical measures such as expanding food stamps.
Perhaps most interesting of all, the panelists, who included senior Reagan Administration economic adviser Marty Feldstein, Clinton Administration Treasury Secretary Bob Rubin, Tax Policy Center senior fellow Jason Furman, macro economist Mark Zandi and former Clinton Budget Director and Federal Reserve vice-chair Alice Rivlin, all agreed that the only way a stimulus package would fly is if it can avoid the theological fiscal battles that have tied Washington in knots for years.
That would mean, in Washington parlance, a clean bill. Feldstein, for instance, said that it should not include any attempt to extend the Bush tax cuts, even though he firmly believes such a change would boost growth. Similarly, while Rivlin, Furman, and Rubin are all concerned about long-term budget deficits, they would not include any explicit provisions to pay for a $100 billion stimulus package, even in the long-term.
Keeping a bill clean, of course, is easier said than done. One lobbyist I chatted with after the session found the whole idea greatly amusing. "This will be the only train leaving the station this year," he said while laughing heartily over his very large steak, "and everyone will want to get on."
For all their agreement, the panelists also previewed some of the deep potential fissures that will surely develop in any stimulus discussion.
Rivlin, perhaps concerned about what an actual stimulus bill would look like, would rather see Washington focus on containing the housing crisis. Given that the rest of the U.S. economy is still doing well, that might not be a bad idea.
Another flashpoint: Who exactly should get a tax rebate? Democrats will want to give it to everyone. In the past, the Bush Administration wanted to target only those who are already paying income taxes.
Not only could this be a political deal-breaker, but it raises big economic issues. How much of their rebate will people spend? Are lower income people more likely to do so than the wealthy? Many economists argue that such windfalls would be spent fairly quickly. A 2004 paper by David Johnson and others concluded that as much as 40 percent of the '01 rebates was spent within three months. But a 2002 study by Matthew Shapiro and Joel Slemrod raises doubts.
