Desperately Seeking Stimulus

No one should be surprised that a powerful political steamroller has developed for a second economic "stimulus" package. Federal Reserve Chairman Ben Bernanke has blessed the idea, and even President Bush has provided vague support. Some congressional Democrats urge a $300 billion plan; some private economists propose up to $500 billion. The case for "stimulus" seems obvious. It's extra insurance against an economic free fall. No one wants a perverse cycle of falling confidence, production, jobs and stocks leading to more loan losses and financial failures—which then depress confidence, production, jobs and stocks.

Still, the case isn't airtight. The first $152 billion stimulus earlier this year had only a modest effect. Americans saved perhaps three-quarters of the personal tax cuts that were the centerpiece of the stimulus. The same might happen with new tax cuts. One popular idea to aid states and localities with money for roads and other infrastructure improvements might take so long to begin that it would provide little immediate economic boost. Moreover, the economy does have self-correcting mechanisms. Lower home prices already show signs of spurring more buying. Falling oil prices now provide some support for consumer spending.

But if Congress and the White House do proceed, they should rise above self-indulgence. The great danger is that a new stimulus will become an excuse for politically pleasing tax cuts and spending programs that have only a modest economic effect and do nothing to improve the long-term outlook. What we really need is a package that also addresses the future.

Herewith, three proposals.

First, let's not let lower oil prices permanently filter through to consumers. We've seen this movie before. A surge in oil prices produces calls for conservation, less dependence on imported oil and more fuel-efficient cars. Then oil prices drop, and we revert to our energy-wasting habits. This sets us up for the next price surge or any politically motivated cuts in foreign oil production.

My suggestion: Raise fuel taxes the equivalent of one cent a gallon per month for four years (total: 48 cents). For now, consumers would benefit from most of the lower prices, but they'd also be on notice that prices won't permanently stay down. To offset any depressing effect of higher fuel taxes, we could lower other taxes in lock step. But the signal of higher long-term prices should affect Americans' driving habits and vehicle purchasing preferences. Congress has increased fuel economy standards for new vehicles from today's 25 miles per gallon to 35 mpg by 2020. But it must also create a market in which buyers favor fuel efficiency.