Part of those new funds, perhaps $80 billion this year, will come in the form of added defense spending and emergency disaster assistance. Beyond that, Washington needs to pass tax cuts that address the problems of weak business investment and worried consumers. That would provide an insurance policy in case the current slump turns out to be longer and deeper than economists now expect.
The questions then are how much the fiscal stimulus package should be and what kind of tax cuts would be the best to pass. On the first point, fast is better than big. Federal Reserve Chairman Alan Greenspan urged Congress to wait for more information before acting. But any delay beyond a few weeks is worrisome. Any cuts need to be in place as soon as possible if they are to help in 2002. Moreover, they should be primarily focused on next year.
The tax-cut plan should be two-pronged. On the investment side, the best proposal is probably accelerated depreciation and expensing for 2002. That would cut the aftertax cost of new equipment and buildings for companies and stimulate investment. On the consumer side, one good option is a refundable income-tax credit for payroll taxes paid for next year. That would put more money into the hands of low-income workers likely to be hit hard by the slowdown.
True, fiscal stimulus is no panacea for economic weakness. Just look at Japan, which started running massive government deficits in the second half of the 1990s. The spending, much of it on unneeded infrastructure projects, kept the Japanese economy afloat in the short run, but did nothing to deal with the larger structural problems that the Japanese economy faced.
But the U.S. is not Japan. The U.S. economy is basically solid, and the Federal Reserve is fighting the slowdown far more aggressively than the Bank of Japan ever did. Facing a short-term crisis, strong fiscal stimulus is exactly the right thing to do.