Fiscal stimulus

While today’s GDP numbers don’t show it (a 4.9% growth in the third quarter of 2007), there is growing worry that the nation is slipping into a recession. Some, such as Marty Feldstein, Larry Summers, and Robert Reich, are calling for fiscal stimulus. Summers calls for a $50 to 75 billion tax cut/spending increase combination. Feldstein isn’t specific, other than to condition it to the economy actually going into recession. Reich wants it to be revenue neutral by cutting taxes at the low income end and raising them at the high end.
But David Wessel, in his column today, points out that “the best political forecast is that nothing will come of this talk of fiscal stimulus.” (Emphasis in original).
Everyone may have missed something, however. Inadvertently, Summers may have gotten his wish — at least in part. Congress passed a $50 billion stimulus package just before it went out. It just wasn’t called a stimulus package. The $50 billion Alternative Minimum Tax “patch” was not offset my any new revenues (the GOP’s anti-tax forces being stronger than the anti-deficit side). And supposedly, it provides a break to the middle class.
While I was initially disturbed at the lack of a budget offset for the ATM, maybe – just maybe some good will come out of this. Not the most effective or well designed stimulus package. But a “stimulus” none the less.
The real question remains, however. Is fiscal stimulus the right treatment for the current situation? Congress has inadvertently set up a nature experiment. We will know the answer in a few months.


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