Economic Stimulus From Washington Isn't A Slam Dunk
An economic stimulus is all the rage in Washington these days. The president says he is seriously considering one and may reveal it in his State of the Union Address; congressional Democrats are talking about one of their own that could be announced before the SOTU occurs.
I'll leave it to Greg Mankiw, Brad DeLong, Dean Baker, and others to talk about what type of fiscal stimulus would work in the current environment and would be something more than an attempt by elected officials to show they are doing something to ease their constituent's anxiety.
But the politics of enacting a stimulus this year are so difficult that it's hard to see how it gets done.
Since the 2006 election, the White House's legislative game plan has been to make it impossible for the Democratic majority in Congress to accomplish anything unless its strictly on the administration's terms. Threatened vetoes, actual vetoes, a refusal to negotiate, a refusal to compromise, and other maneuvers have stymied the Democrats on almost all issues.
With the notable exception of funds for Iraq and Afghanistan, congressional Democrats have mostly been unwilling to go along with the president's preferences.
Congressional Republicans have supported the White House's strategy in large part because they see little value in enabling the Democratic majority to accomplish things and make the House and Senate work better than when they were in charge.
With the election now only a few months away, it's hard to see how this will be any different in 2008.
Unless the economic situation becomes unambiguously worse and the White House and Congress both understand that they have permission to move from their current positions and compromise, it's hard to see how everyone agrees on what the economic stimulus should be and on getting its done when it will actually have a positive impact.
The most likely scenario is that the Bush administration and congressional Democrats will quickly get in a bidding war over a tax cut.
The White House proposal almost certainly will provide a break to a very different constituency than the Democrats. If the politics of the past year continue, the administration will be unwilling to agree to the Democratic proposal and the Democrats will oppose the president's plan. Each will criticize the other but no real attempt at compromise will occur. A Democratic plan will need 67 votes to get past the inevitable veto and congressional Republicans won't supply the votes needed to do that so that they can deny the Democrats a victory just before the election.
There are only two reasons this might happen differently.
First, as noted above, if the economic situation becomes far more worrisome than it is today and not acting and obstructionism becomes more of a political liability than it is right now, an economic stimulus might be agreed to in Washington much faster than currently seems possible. The White House and congressional Democrats could compromise, or the administration could refuse to compromise but congressional Republicans (who unlike the George W. Bush are actually running for reelection) could provide the votes to override the president's veto.
Two things to note.
First, a compromise stimulus package could include some or all of what the White House and congressional Democrats propose. That could easily double (or more) the size of the tax cut, the increase in the deficit, and the amount of government borrowing that will be needed.
Second, economically speaking, the need for a fiscal stimulus could be obviated by the Federal Reserve. That does not mean, however, that lawmakers running for reelection may be willing to sit back and make it look like they had nothing to do with trying the make the economic situation better. No one should be surprised, therefore, if a fiscal stimulus move forward even if the Fed acts.