US government recession-fighting record is mixed
Updated: 2008-04-05 10:37
WASHINGTON -- If history is a guide, US government efforts to combat recessions often come too late to do much good. Furthermore, such efforts can sow the seeds for the next downturn.
The news Friday that the economy shed 80,000 jobs in March, the worst loss in five years, triggered a wave of hand-wringing, faultfinding and proposed fixes in Congress and in the presidential campaign. The jobs report added to a building consensus that the country has slipped into recession, one that may have begun early this year or in late 2007.
Yet past efforts to head off or alleviate recessions with crash spending programs and tax rebates, classic antirecessionary plays, often did not kick in until after the recession had ended.
"History shows very often these programs even go on for years and years after the recession is over," said economist Bruce Bartlett, who worked in the 1980s administrations of Presidents Ronald Reagan and George H.W. Bush.
Of the eight US recessions in the six decades since World War II ended, only once was the stimulus package passed before the recession's end, Bartlett found. That was legislation enacted in June 2001 that contained the first round of President George W. Bush's tax cuts - to combat a recession that began in March 2001 and ended in November 2001. "That would be the rare case," Bartlett said.
In the seven other postwar recessions - November 1948-October 1949, August 1957-April 1958, April 1960-February 1961, December 1969-November 1970, November 1973-March 1975, July 1981-November 1982, July 1990-March 1991 - stimulus packages were either passed just as they were ending or considerably later.
Part of the reason for the mismatches, besides usual congressional delay, is because it often is not known for months, even years, when a recession officially begins and ends. Two consecutive quarterly contractions in the gross domestic product is the common definition. But the official determination, made by the National Bureau of Economic Research, takes longer and is based on a more complicated formula.
It still is too early to know the impact on the economy of the $168 billion (euro106.9 billion) stimulus package passed by Congress and signed by Bush in January. Rebate checks of up to $1,200 (euro765) per couple and even more for families with dependent children will start arriving in mailboxes in May. Bush has argued against additional stimulus packages.
The Federal Reserve, the US central bank, also has antirecessionary weapons at its disposal, primarily the ability to lower short-term interest rates and inject more liquidity into the financial system. The Fed has dropped rates a full 3 percentage points since September to 2.25 percent. Studies show it takes nine to 12 months for Fed rate cuts to affect the economy.
The central bank recently took extraordinary steps to calm financial markets from a panic triggered by mortgage defaults, including arranging the $29 billion (euro18.5 billion) rescue of investment house Bear Stearns, and offering hundreds of billions of dollars in new emergency loans to investment banks and other financial institutions.
The new jobs report shows a loss of jobs so far this year of 232,000 and a jump in the unemployment rate to 5.1 percent from 4.8 percent. That puts the Fed under pressure to cut rates further and to do more to calm jittery markets. But there are limits to how much more it can do.
It probably is too late to do much else that will help, either by the Fed or by Congress, to keep the recession from ending earlier than it will on its own, said David Wyss, chief economist at Standard and Poor's.
The $168 billion (euro106.9 billion) package will help a bit, Wyss said. "Otherwise, the usual pattern is that by the time Congress does anything, you're back in the recovery phase, and you end up boosting the recovery too much. And creating the seeds of the next recession," he said.
Still, Alice Rivlin, former director of the Congressional Budget Office and later deputy Fed chairwoman, said the government has been quite successful in recent years in mitigating the severity of recessions. "We haven't had a really bad one in quite a long time. We have a lot more tools now, and the economy is more flexible than it used to be," she said.
Chris Edwards, director of tax policy for the libertarian-leaning Cato Institute, cites an "unquenchable taste in Washington" to find quick fixes for hard times, and that is even more pronounced in an election year. "Congress and the administration want to be seen as doing something, and the politicians on the campaign trail are going to be promising even more."
As if on cue, Republican John McCain and Democrats Hillary Rodham Clinton and Barack Obama all issued statements decrying the job losses, and offering their competing remedies, within an hour of the bleak Labor Department employment report's release.
Clinton urged quick action to keep the economy from "sliding into a deep and painful recession" and characterized herself as a 21st Century "Paulette Revere calling for action to keep the problems from our housing market from spilling over into our economy." Paul Revere was an early US revolutionary whose fame is based on his effort to warn his colleagues of an impending British attack.
Obama said the jobs report underscored that "for millions of unemployed Americans, the American Dream has been slipping away while their government has put special interests ahead of their interests."
Both Democratic candidates have recommended tens of billions of dollars in additional middle-class tax relief and help for distressed homeowners. They also blamed the Bush administration for the current woes and sought to link Republican candidate McCain to Bush's policies.
McCain accused Democrats of pursuing "an antigrowth agenda" and called the jobs report "a stark reminder of the economic challenges confronting families today." He wants to battle the downturn by keeping Bush's tax cuts from expiring, reducing tax burdens on businesses and opening the way to more free trade.
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