Stop 'Spinning' and Start Fixing the Economy

The Los Angeles Times

Almost everyone agrees that the economy needs a kick. Anxieties about terrorism, job losses and record household debt are causing consumers to pull in their belts. Businesses have all but stopped spending.


So why is the federal government's much-heralded "stimulus plan" getting nowhere? Blame politics. Senate Democrats and House Republicans are locked in a game of chicken. Both sides are eyeing the midterm elections next November. A small shift in voter allegiance could swing the balance of power in either chamber. Both sides want to tell their constituents that they've gone to bat for them.


House Republicans want to crow about tax cuts for businesses and individuals. Democrats want to boast that they've fought for expanded health and unemployment benefits to laid-off workers and more spending on domestic security. Neither side has much incentive to compromise except for the possibility that the recession will deepen and that they, rather than their opponents, will be blamed for the stalemate. But the real problem is that neither approach would boost the economy. The Democratic Senate bill--quashed Wednesday in party-line votes--was too small at $73 billion, less than 1% of the national product. The Republican House bill gives tax breaks to companies that won't spend the extra money because they already have too much capacity, and to rich folks who won't spend it because they already spend as much as they want.


For this, blame ideology. Both parties are under the spell of outdated economic theories. Democrats won't go with a bigger stimulus because they're still under the illusion--gleaned from the 1990s when President Clinton cut the deficit and the economy blossomed--that all deficits are bad. Republicans won't give up their tax cuts for corporations and the rich because they still cling to President Reagan's supply-side mantra, which supposedly spurred entrepreneurial zeal.


The deadlock is worrying because the only other tool for getting the economy moving is the Federal Reserve Board's control of short-term interest rates. And that doesn't seem to be working. Granted, there's usually a lag of six to eight months before a rate cut takes hold. But the Fed started cutting rates last January and still has little to show for it.


The benchmark rate is now 2%, the lowest in four decades. And if deflation--dropping prices--is on its way, more cuts would be ineffective. With deflation, tomorrow's dollar is worth more than today's. Even at zero interest, people won't be eager to borrow when loans have to be repaid in money that's worth more.


There's some evidence that deflation is already with us. Producer prices dropped a record 1.6% in October. Prices paid by consumers in the third quarter, including services, dropped for the first time in nearly 50 years.


If the U.S. is heading into a deflationary downdraft, it's even more urgent that we get a strong stimulus package--$200 billion to $300 billion over the next 12 months. It should include a temporary reduction in payroll taxes so that extra cash gets into the hands of moderate-income people who are the most likely to spend it. The cash infusion could be almost immediate. The stimulus also should include extra spending that extends unemployment insurance, provides health care for families of those who lost jobs and repairs the nation's crumbling infrastructure. The federal government also needs to help state and local governments, many of which are so strapped that they're starting to cut social services.


But for a real stimulus to happen, our representatives in Washington have to put aside partisan politics and ideology. Democrats have to give up their born-again orthodoxy of fiscal austerity. Republicans have to give up their religion of supply-side tax cuts for corporations and the rich. Both have to stop "spinning" for the 2002 elections.


At a time when the nation is coming together, it seems only fitting that Washington do the same.

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