Stimulating Talk, Redux

When Bob Kerrey, governor of and then senator from Nebraska, was asked about dating the actress Debra Winger, he said she was his "stimulus package." That versatile locution is back in vogue and is being applied to the economy, of all things.

Partisanship in Washington can be costly, but so can consensus, and suddenly there is agreement that the economy needs to be stimulated. The supposed crisis that is causing this meeting of political minds is that the market is correcting some mistakes made about something central to capitalism, not to mention progress—risk taking. There has been too much risky lending to unqualified ("subprime") borrowers, who were living riskily.

Corrections are necessary: When too much housing has been built, the market must clear the inventory. Corrections can be painful: Housing prices have declined. Lower housing costs are not an unmixed curse: Partly because of something dating from 1913 (the mortgage-interest deduction) and partly because of recent low interest rates, too much American wealth is tied up in housing. But houses are most Americans' largest assets, so homeowners, feeling less wealthy, are curtailing their spending, which causes lenders to curtail their lending, which further inhibits spending.

Six weeks ago, a poll showed that 57 percent of Americans already felt the nation was in a recession. But a recession is not a matter of feelings; it is two consecutive quarters of economic contraction. But there recently has appeared the oxymoronic phrase "growth recession," by which a recession can be declared to exist—and Washington activism justified—whenever growth is less rapid than it recently has been.

A real recession may have started, although in the fourth quarter of 2007, aggregate hours worked increased, as they did in the third quarter, and oil prices have declined. Economic fears can, however, become self-fulfilling by paralyzing decisions to consume and invest.

Often, the wise response to an economic correction is "Don't just do something, stand there," because the market is doing the right things. But corrections provoke political competition to provide relief. And when government "fine-tunes" the economy with "demand management," it responds to economic conditions as they were, not as they have become. The ameliorative measures Congress will legislate, perhaps by March, will be responsive to economic conditions indicated by statistics collected many months before the measures will begin to affect economic behavior, if they do affect it.