Lifting economy: Whose job is it?

Pressure mounts on government, as new figures show a barely moving US economy.

The listing economy is quietly reviving a debate not heard in the US in more than a decade:

What role - if any - should the government play in trying to turn it around?

It has become almost an article of faith that the Federal Reserve Board, under the horn-rimmed watch of Alan Greenspan, would take care of any steering the US economy needed. But after seven interest-rate cuts in eight months, the economy still isn't responding much to the Fed's actions.

That was evident again yesterday, with the report that the US gross domestic product grew at an almost imperceptible 0.2 percent rate from April through June.

Consequently, pressure is growing in Washington - particularly on the White House, with important midterm elections approaching - to consider other options to keep the factories of America stamping out automobile fenders and silicon wafers.

On one level, Washington has already acted. The 10-year, $1.35 trillion tax cut, Republicans in particular argue, was the best thing the federal government could do to put money back in peoples' hands and eventually lift the economy.

But the idea of a tax cut as a stimulus was almost an afterthought. It was originally designed to give Americans back some of their money in the face of a massive federal surplus.

Now one of the debates is centering around whether another adjustment in tax policy is needed. Ironically, in this exchange, some conservatives are playing the role of Keynesians - arguing for more government action, in the form of an even bigger tax cut.

Many economists agree that further stimulus would help. Alex Izurieta, for instance, argues that the Bush tax cut is not sufficient to return the economy to a proper growth path.

"It should be tripled," says the Levy Institute economist in Annandale-on-Hudson, N.Y. Any new tax cuts should, though, be aimed more at ordinary taxpayers, who tend to spend their tax savings, rather than the rich, who benefit most from the Bush plan but tend to set money aside.

But Democrats, traditionally the party more enamored of economist John Maynard Keynes, today cast themselves as guardians of fiscal discipline.

Some Democrats even talk of trimming back the Bush tax cuts, especially for the well-to-do, to preserve a surplus in the Social Security portion of the budget. Both parties have agreed to a so-called lockbox for that money, but Mr. Bush has recently sounded less concerned than Democrats about tapping it, if it will help avert a recession.

The risk for Democrats, in this stance, is that the only way to maintain a Social Security surplus is to raise taxes or cut government spending. Economists would consider neither action desirable in a languid economy. It echoes the budget-balancing measures of President Hoover in the Great Depression.

In the end, both parties may be open to some spending that could have a stimulative effect. Bush wants to add $18 billion to the defense budget, and both parties want to spend more on education and prescription-drug benefits.

Ultimately, some economists say, the government may not have to do anything. The modest measures Washington has already taken, coupled with the Fed's interest-rate action, may be enough to move the economy forward.

Paul Kasriel, an economist at the Northern Trust Co. in Chicago, figures the economy is already set to bounce back "any day now." The Fed is growing the US money supply - the fuel for economic activity - at a 9 percent annual rate. That will do the job.

In fact, even if no new federal fiscal steps are taken, some federal actions are happening automatically that could help boost the economy at the margins. Whenever a slump happens, economists say a number of "automatic economic stabilizers" spring into action, largely unnoticed.

Unemployment insurance bolsters the income of those who have lost jobs. Welfare payments grow as work become harder to find. When some people's income falls to poverty levels, they become eligible for Medicaid. All these developments cost either the federal or state governments money, reducing budget surpluses. But the outflow of government money supports personal incomes - and thus spending - that add to GDP.

The risk of a snowballing decline in the economy is thereby reduced. The government money helps break the cycle of lost jobs, lost income, lost spending, reduced business income, and hence more layoffs.

"The surplus gets too much attention," says Steve Fazzari, an economist at Washington University in St. Louis. "Let's not worship surpluses. Surpluses should shrink when an economy slows."

Yet there are benefits from keeping surpluses high. They help keep interest rates down, and thereby encourage investment in new plants and equipment by business.

A large surplus also reduces the federal debt owned by the public. That will have long-term benefits: When baby boomers retire, a smaller portion of government revenues would be needed for debt service - making it easier for Uncle Sam to fund retirement checks.

But for most economists, Job 1 is to get the economy on an upward path quickly. This would ensure more government revenues and enhance the possibility of large future surpluses.

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