Economic Fixes, Quick or Otherwise, Have Detractors

Worries abound that whatever the government does, it won't help.
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As Democrats and Republicans duke it out over President Bush's fiscal stimulus proposal, some on Wall Street are wondering if anything the government does for the economy is ever good.

"I don't think there should be fiscal stimulus," said Bruce Bartlett, a senior fellow at the National Center for Policy Analysis. "It's unlikely anything will be done fast enough to make a difference."

Bartlett has studied fiscal policy in every post-war recession from World War II through 1991. His finding: The timing of it is always wrong. Anti-recession legislation in the '70s, for example, became law after the recession had already ended in March 1975.

"There's little opposition to a government fiscal stimulus program," said Mickey Levy, an economist at Banc of America Securities. "But if it's a only temporary solution, the market will see right through it."

On Oct. 5 President Bush outlined his agenda: "To stimulate the economy, Congress doesn't need to spend any more money. What they need to do is cut taxes. So I propose that the United States Congress, as quickly as possible, pass tax relief equal to or a little bit greater than the monies we have already appropriated." The grand total: $60 to $75 billion in extra spending.

Whether or not this proposal will be enacted remains to be seen: "You have to consider the proposals to be an opening bid," said Bruce Bartlett, a senior fellow at the National Center for Policy Analysis. "I'd be surprised if fiscal stimulus looks like these proposals."

The government has provided $40 billion for disaster relief and $15 billion for a bailout of the airline industry already. In addition, the Defense Department has been given $345 billion for the coming fiscal year -- $30 billion more than was in its budget initially.

Deficit spending has a long history as a tool of fiscal stimulus and was once considered a panacea for ailing economies. But the philosophy took a beating in the '70s when rampant government spending caused a huge spike in inflation and interest rates.

Measures that pressure the budget look particularly risky after eight years of often-painful discipline under President Clinton. Indeed, the architect of that policy, former Treasury Secretary Robert Rubin, has come out against too gung-ho an approach.

"While our strategy needs to be geared to the changed economic situation at hand, the laws of economics have not changed, and the fiscal discipline that was so enormously important over the last eight years is still extremely important now," Rubin recently wrote. "Since the short-term fiscal position has changed dramatically, it is all the more important to preserve our already diminished long- term fiscal health."

Rubin worried that fiscal recklessness would drive up long-term interest rates, an opinion shared by others.

"A package that worsens the already deteriorating long-term budget outlook by reducing revenues or increasing expenditures on an ongoing basis would exert upward pressure on long-term interest rates," said Robert Greenstein, executive director of the Center on Budget and Policy Priorities.

The details of the proposal haven't yet been specified. Speculation is for $30 to $40 billion to go toward a sizable personal tax cut. There are also expectations for a temporary investment tax credit for businesses.

"It is difficult for fiscal policy to be effective against cyclical downturns," said Christopher Wiegand, an economist at Salomon Smith Barney. "But it will have some sort of impact."