This trend raises the risk of a worsening economic slump. It needs countering with easier monetary policy and "short-term fiscal stimulus," says Bluestone. He emphasizes the words "short-term." Tax rebates or tax cuts shouldn't be permanent, he says. Putting an extra $300 or more into the pockets of consumers will prompt some of them to spend, some to reduce debts, and some to save.
"It will make people feel less poor," says Bluestone.
Yes, the tax stimulus raises federal debt. But with the economy already slowing, the nation must avoid hitting the economic brakes; rather keep it moving to slow rising unemployment and the weakening of businesses.
When the temporary tax cuts end, the economy should be moving forward again and federal revenues will rise to trim or end the federal budget deficit. That, explains Bluestone, is what happened in 1995-96 under President Clinton. And if necessary, the government could dampen a new vigorous economic expansion to trim rising inflation.
"At least we tackle that problem when the economy is growing, not declining," says Bluestone. "It's a timing problem."
Certainly, the 80 percent of Americans who have seen no increase in their real income for the last five years will benefit from the fiscal stimulus, Bluestone says. Many "working stiffs," he says, will spend their tax rebates.
The impact of a recession on people is nothing to sneeze at. Fearing the political and economic consequences, Congress and President Bush, Democrats and Republicans, have managed – so far – to agree on a fiscal stimulus package.