As lawmakers debate a bill to invigorate the ailing economy, conservatives and liberals have split into (predictable) camps over its contents. The former want to tilt the $825-billion package toward more tax relief, particularly for employers. The latter want more government spending, arguing that it's the most efficient way to promote growth. It has become something of a religious debate, with both sides clinging tightly to beliefs that they can't actually prove.
Let's face it, even economists are having trouble finding the right response to the current problems. For the last few decades, Washington has battled recessions mainly by lowering the central bank's interest-rate target. The supply of cheap money stimulated spending and revived the economy, in large part by making it easier for businesses to invest, restructure and rebound. But in the current downturn, credit has remained stubbornly tight even as the Federal Reserve pushed interest rates practically to zero. So Congress has come under intense pressure to act, even though its track record on turning the economy around is mixed at best.
We think a sizable stimulus package is warranted, but lawmakers have to jettison their ideologies and focus on results. There's no right balance of tax cuts and spending programs; instead, there are more and less efficient techniques to increase consumption and production. Congress also has to try to use the money in ways that people can see and feel, to maximize the psychological impact. Consumers' pessimism and insecurity are exacerbating the downturn, potentially turning a dip into a downward spiral.