Unease about fiscal boost

The Baltimore Sun

WASHINGTON -- As President Bush and Congress weigh the need for a stimulus package to ensure that the slowing economy keeps growing, experts warn that there's insufficient evidence the effort is needed and that it could do more harm than good.

No one can yet say with certainty that the U.S. economy is about to enter a recession, defined as two consecutive quarters of negative economic growth. And by the time that becomes clear, a stimulus plan could be too late to do much immediate good.

"I just don't see anything useful getting done quickly, and the first half of the year is the critical period," said David Wyss, the chief economist for the rating agency Standard & Poor's in New York.

Driving talk of a stimulus package is Friday's weak employment data, which showed anemic growth of just 18,000 nonfarm payroll jobs, the weakest in four years. If that's followed by similar numbers in the months ahead, it would point to weaker consumption. And since consumer spending drives about two-thirds of U.S. economic activity, it could point to a recession.

It's why President Bush conceded Monday that there were new "economic challenges," and it's what has led his aides to confirm that he's weighing a stimulus package. Former Treasury Secretary Lawrence Summers and Harvard University economist Martin Feldstein earlier had called for targeted measures now to keep the economy out of recession.

Bush's last stimulus package in 2001-2002, amid a recession and after the Sept. 11 terror attacks, included tax breaks for businesses to spend more on equipment, inventories and hiring.

It also extended unemployment benefits, expanded food-stamp programs and provided one-time government checks to about two-thirds of all citizens.

Most of those ideas are under discussion again.

On Tuesday, the U.S. Chamber of Commerce called on Bush to lower the corporate capital gains tax as he did for individual taxpayers.

For political reasons, a stimulus package seems almost certain. Bush doesn't want to sink his party's election chances with a sluggish economy or, worse yet, one that's in recession.

Case not clear

Yet on strictly economic terms, the case for a stimulus package isn't clear.

For starters, December's employment data may have been an aberration.

James Paulsen, the chief investment strategist for Wells Capital Management, part of the large national bank Wells Fargo, points to an unusually large number of people who fell into the category of "not at work due to bad weather" during the Labor Department's recent reporting period. The December figure of 187,000 was about 59,000 people above the historical average for that month.

"I think this suggests that perhaps many reports for December were 'downside' weather distorted," he wrote in a Jan. 4 note to investors.

Paulsen and some other economists believe economic growth during the last three months of 2007 may prove stronger than forecast, perhaps as high as 2 percent. That would mean proof of a recession wouldn't be apparent until at least June. And on the heels of 4.9 percent growth in the third quarter of 2007, it suggests strong tail winds could lead to slower growth but not a recession.

'Just slow growth'

That view was shared by the National Federation of Independent Businesses. On Tuesday, it released its December survey of economic trends affecting small businesses, which found that its members still plan to add jobs and boost spending.

"Overall, no recession in the data, just slow growth with, unfortunately, higher-than-desired inflation," wrote William Dunkelberg, the federation's chief economist.

Aides to President Bush said he's not expected to discuss any stimulus plan before his State of the Union address Jan. 28. Leading Democrats in the House of Representatives and the Senate confirm that they, too, are crafting a stimulus package.

Experts fear that a stimulus could come with a cost to long-term economic well-being.

When Bush got a stimulus package through Congress in 2001, he did it with a budget surplus. For the 2007 fiscal year, which ended last Sept. 30, the federal deficit swelled to $163 billion, a stark number but one not historically high as a percentage of the total economy.

Starting from hole

Vincent Reinhart, a former top Federal Reserve economist now working for the American Enterprise Institute, a conservative policy group, fears the president and Congress could pile onto the deficit.

"Anytime you start from a hole, digging usually isn't the strategy to get out of it," Reinhart said.

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