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As economy lags, what levers to pull?

Pressure is mounting for the US government to act soon to prevent a recession.

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Part of the pressure on Bush is political. Historically, a bad economy in an election year tends to hurt the party that controls the White House.

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Beyond that, policymakers of all stripes have an interest in keeping the economy as strong as possible. The question, as always, is how to do it.

Talk of fiscal stimulus has grown louder in recent days.

One reason is that so far, policy efforts to contain the housing slump have had only limited success.

Similarly, the Fed can only do so much.

At a time when banks are wary of lending and businesses are wary of investing, interest-rate cuts may be relatively ineffective. Moreover, if monetary policy gets too easy, inflation could pick up – creating a new problem rather than solving one.

Still, Wall Street traders now expect the Fed to cut rates again this month, perhaps by as much as half a percentage point. Investors signaled their worry about the job market Friday by pushing the Dow Jones Industrial Average below 13000.

Prominent economists on both left and right – including conservative Martin Feldstein and former Clinton official Lawrence Summers – now say the risk of recession warrants some fiscal stimulus.

"There are a variety of options we can consider," White House economic adviser Edward Lazear said on CNBC Friday.

Bush is expected to comment further on the economy in a speech Monday. A proposal could take shape for Bush's State of the Union address in a few weeks.

What can a fiscal stimulus plan accomplish?

The general view of policy experts is perhaps something, but probably not a lot. The political backdrop is difficult, and so is the budgetary one.

Bush has already won large tax cuts. Meanwhile, in coming years the federal government faces a looming difficulty paying for all the spending commitments. That leaves politicians a bit less room to bring taxes down lower for short-term needs.

"What the Bush administration did [in 2001] was accelerate the tax cut by sending out the so-called rebate" checks, Ms. Rivlin says. "That had some effect."

Given the long-run fiscal challenges, she says Congress might insist that any fiscal stimulus be paid for at some point, and not simply add to government debt. "The Democrats have, rightly I think, put a lot of emphasis on fiscal responsibility and things being paid for."

Mr. Foster says one possible tax cut might be to make property taxes deductible from the federal income tax even for people who don't itemize their deductions. This would put money in many pockets. And assuming it was a permanent change, this move would bolster home values – a boon since foreclosure often occurs when a property's value falls below the borrower's loan balance.

Chad Stone, chief economist at the left-leaning Center on Budget and Policy Priorities, says any stimulus package should be carefully targeted to bolster consumer spending and help households most in need. Extending unemployment insurance and expanding food-stamp aid are two examples, he says.

Or, since states face pressure to curb spending during recessions due to budgetary constraints, Congress could provide aid to state and local governments. This might allow them to avoid cuts in Medicaid.

Another idea, floated by Harvard University's Mr. Feldstein, is a uniform rebate for each US taxpayer.

A key priority is timing. Both Feldstein and Mr. Stone support a policy with triggers, so that it goes into effect only if several months of data confirmed deep problems for the economy. Passing such a bill soon would ensure that help comes quickly if it is needed.

"There's a high risk of bad policy" or, more likely, no policy, Stone says. "We have to hope that the [consensus] forecast is correct – that we don't even go into a recession."

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