Global efforts to beat back the credit crisis are starting to take hold. But there's no rest for the weary in this battle. Now it's on to fighting off a steep recession. Big economies – Germany, Japan, South Korea – are rolling out new stimulus plans. The US should, too.
Last week's third-quarter report showing a contracting US economy should remove whatever hesitation may linger about the need for a jolt. In July, August, and September, consumer spending shriveled like rhododendrons in winter, with Americans pulling back to an extent not seen in nearly 30 years. And this was before the full impact of the financial crisis became clear.
Even Ben Bernanke of the Federal Reserve, which is the institution most able to steer America's $14 trillion economy, advocates a stimulus. Indeed, with the Fed dropping interest rates to 1 percent, it's now low on additional leverage itself.
But what should a stimulus package look like? It's difficult for lawmakers to design a combination of spending and tax cuts that pushes the right part of the economy, at the right time, by the right amount.
One thing not to do is mail tax rebate checks to Americans, which they received last spring as part of an earlier stimulus package. Most of that cash went to pay down debt or savings – not spending that would quickly boost the economy. Smartly, neither political party seems interested in this idea now.
It's important to remember the purpose of a stimulus is to prevent a dive into a deep recession. That's why a lame-duck Congress must tackle it when lawmakers return after elections. Reorienting the economy to be less dependent on consumer spending and more focused on high-skilled labor that produces exports is a longer-term aim for the new president and Congress.
While not getting into a prescription, Mr. Bernanke has given good guidance for a stimulus package: It should be short term, have an immediate effect, and not contribute to the long-term deficit.
The trick will be passing a plan acceptable to Democrats and Republicans. Democrats would like to spend up to $300 billion on infrastructure and helping states with shrinking budgets. Republicans favor cuts in corporate and capital gains taxes.
One area of potential agreement is to temporarily extend jobless benefits and increase spending on food stamps. This helps those in most need and directs dollars to people more likely to plow their benefits back into the economy than to divert them to savings – a point made by the Congressional Budget Office.
The CBO is not keen on stimulus spending on infrastructure – and neither are Republicans and some Democrats. While every $1 billion spent on mass transit or highways leads to at least 35,000 jobs, such projects require lead time, and fail Bernanke's immediate-impact test.
But about 3,000 projects around the country are ready to go, and only lack funding. Sending money to states for this purpose would meet their present needs without balancing their budgets for them. Congress could spare the deficit by paying for this via a higher gas tax.
Such spending also makes a down payment on larger needs. Besides investing in education and clean energy, America must overhaul bridges, airports, and rail.
But we're getting ahead of ourselves. First, lawmakers should pass a targeted, short-term stimulus. Time is of the essence.