The economic fight

Congress has two battles to fight: one against terrorism and the other against recession. It is more likely the second that will invite partisan politics and therefore requires more members of Congress to define just what effect they hope any economic stimulus package would produce. Advice this week from Federal Reserve Chairman Alan Greenspan and former Treasury Secretary Robert Rubin is worth remembering.

The revered ones of the economy say a cut in the capital gains tax, supported by some in Congress, is a poor choice and they don’t much like the administration’s idea of reducing corporate income taxes. Both have too little punch in the short term and are too costly in the long. Instead, they counsel Congress to take its time to understand what impact the attack has had on the economy. They suggest that any package be temporary and designed to give consumers and businesses a quick, substantial boost. Mr. Greenspan suggested the size of such a package be approximately $100 billion, counting the $40 billion tax rebate and the $18 billion bailout for the airlines.

The most attractive possibility for the remaining $40 billion to $50 billion is a broad tax rebate, but UMaine economist Ralph Townsend points out that many receivers of such a rebate are likely to stick that money in the bank, a rational response to a windfall. If the government were to spend that money on infrastructure, he observes, all the money would be spent in a portion of the economy – construction – that is expected to soften in the coming months. As a bonus, the nation would have improved roads, bridges and rails that would help the economy for many years to come.

Mr. Townsend further notes that states, including Maine, currently are struggling to meet their budgets and are looking for ways to reduce spending at precisely the time that more spending would help the overall economy. Federal grants for specific types of state spending might be in order. Political economist John Buell of Southwest Harbor suggests strengthening state unemployment funds to deliver more money to people who would spend the money immediately and locally.

Congress should have a lively discussion in the coming week about where new spending should go, but the key is to remember that a fiscal stimulus package is not specifically intended to relieve a business of its tax burden or provide relief to the poor. Its sole purpose is to help the economy steer away from recession, so a proposed remedy should provide evidence that it would accomplish this more effectively than other choices. Mr. Greenspan and Mr. Rubin this week presented excellent guidelines for whatever solution Congress chooses.