A perfect storm door against a U.S. recession?
Cries of coming recession must not trigger a political split in Washington over a stimulus response.
This being both an election year and one that began with the economy cooling, Americans will hear a Goldilocks' debate on how government can heat up a $14 trillion economy. Will a tax-and-cash stimulus package be too little or too much? Too early or too late?
And that's only the short-term perspective, focused mainly on some forecasts of a recession over the coming year.
In the presidential primaries, voters tell pollsters their top concerns are basic economic needs, such as rising prices for energy and healthcare and less job security. And indeed, candidates have offered long-term reforms defining new and different types of a federal role in the economy. But in the past week, candidates have also begun to offer sound bite proposals for a quick economic spur.
At the outset, those talks appear to be bipartisan. Both the White House and Hill Democrats, for instance, have the similar idea of putting cash into the hands of consumers, hoping they will spend it rather than save it. After all, one party controls Congress, the other the presidency. Each could be blamed for a recession, so each has a stake in preventing or softening one.
And Washington may have heard the voters' message in the primaries for less political posturing, which causes stalemates, and more across-the-aisle compromise.
But even within each party, Democrats and Republicans are split over issues such as tax policy and budget balancing. Mike Huckabee and John Edwards, for instance, are both to the left of their respective parties' mainstream. Their rise or fall in the primaries will influence this policy debate.
The consensus remains that the country needs some recession "insurance." The urgency was felt in December's unemployment rate, which rose from 4.7 percent to 5 percent in only one month – a large increase by historical standards.
Short and mild recessions are sometimes the best way to cool inflation or to erase the aftereffects of a burst financial bubble in a particular sector. Right now, inflation is rising and the US is slowly working out a collapse in house prices. And the US economy has become so large and globalized that Washington's ability for quick fixes has shrunk.
Policymakers need to decide if it is better to buffer the worst effects of slowdown on the poor, such as with longer unemployment insurance, rather than try to stimulate growth. At best, a combination of tax rebates for consumers and some temporary business tax relief might provide sandbags against a recession.
But such steps must also be weighed against the risk of stimulating more inflation or, perhaps, triggering another bubble in particular assets. And Congress also needs to find a way to pay for those rebates and tax benefits.
Thus the need for a bipartisan solution to a stimulus. Election pressures on politicians are strong to do something and getting credit for it. But voters clearly want a joint decision, one that addresses both the long- and short-term reforms needed for the economy.