Pulling together such a package may make political sense (see BW Online, 10/20/02, "The Democrats' Economic Deficit"). But it doesn't make a lot of economic sense. A stimulus now has at least three things going against it: It's the wrong medicine for what ails the economy, the timing is terrible, and already-rising budget deficits increase the chances that the benefits of stimulus will be washed out by rising interest rates.
SOLID GROUND. If policymakers are going to enact a stimulus, they need to target the right problem. And the difficulty isn't fundamentals -- it's a broad malaise. Indeed, the recovery seems to be on solid ground. Retail sales, excluding autos, have gone up four consecutive months. Inventories are low, so businesses will soon have to boost production to keep up with demand.
However, a strong bounceback is being restrained by uncertainty over such matters as the likely war against Iraq, terrorism, and nagging fears of more corporate scandal. This sense of unease is very real, and it could produce some serious economic trouble if it continues much longer. But it isn't a disease that responds well to gobs of cash.
By spring, the causes of unsease should have passed
Under such circumstances, it doesn't make sense to write taxpayers a check in the hope that they'll run out and spend it. Nor does it seem sensible to give businesses new tax breaks to purchase equipment. Companies have plenty of cash. And lots more money is available to borrow -- at least for creditworthy companies. Businesses have the resources to expand. What they lack is the will. Like consumers, they buy when they feel more comfortable about the future.
The next problem is timing. Unless the economic news turns suddenly and massively bad, it's unlikely that Congress will pass any sort of stimulus package until next spring at the soonest. And by then, the causes of the current unease should have resolved themselves. The Iraq war probably will have been fought. And, as more time passes, fears of new business scandals will fade.
LAME DUCKS IN A ROW. Besides, modest signs of a turnaround are already showing up. The stock market may have found a bottom. Corporate profits, which have been disappointing in recent quarters, are now showing some improvement. Even leading tech companies, such as IBM and Microsoft, are reporting decent earnings.
Could Congress act sooner than next spring? Well, lawmakers have already gone home to campaign for the November elections. And while they'll return to Washington for a brief lame-duck session in mid-November, such gatherings are notoriously unproductive. A bad economy could prod them into action, but the pols will be working from third-quarter gross domestic product data -- due out at the end of October. And, according to a weekly survey of some 15 forecasters by consultants Macroeconomic Advisers, that report is likely to show solid growth of 3.8%. That's hardly reason for a gridlocked legislature to act.
Congress was lucky when it passed the 2001 tax cut. Although the long-term cost was hideous, the timing helped ease the slump. Washington wouldn't be so lucky even if it doesn't act until next spring.
VIGILANTE ATTACK? And then there's the deficit. In 2001, policymakers thought they had plenty of surplus funds to play with. Not now. The federal government has good reason to run a small deficit during a recession. But the U.S. is already beginning to gush red ink -- even before doing another stimulus. Wall Street firm Salomon Smith Barney now projects a $250 billion deficit for fiscal 2003. Some stimulus plans on the table would cost $200 billion more. Deficits of $450 billion are sure to get the bond vigilantes' attention.
Bond yields had already fallen to unsustainably low levels. And in just the past week, rates on 10-year Treasuries have bounced up by nearly half a percentage point. If deficits approaching 4.5% to 5% of GDP get the bond market nervous, interest rates could easily run up another percentage point. For somebody with a $200,000 mortgage, the difference between a 6%, 30-year loan and a 7.5% note is $200 a month. And that's far more than most of us would ever see through any stimulus package.
The economy hasn't bounced back as quickly or as strongly as everyone had hoped. And the temptation to do something about it has lawmakers scrambling for ideas. But sometimes the best response is to do nothing and let the market work itself out. Increasingly, this looks like one of those times. Gleckman is a senior correspondent in BusinessWeek's Washington bureau. Follow his views every Tuesday in Washington
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