What We Need For Christmas

Santa, baby, slip a sable under the tree, for me..." Eartha Kitt, the original material girl, hit pay dirt with that torchy lyric back in 1953. But during wars and recessions, holidays don't reverberate with the same ka-ching. For Christmas, Americans want two things--bin Laden and a sense that the country is on the mend.

Santa (baby) Alan Greenspan might deliver an end to the business slide in early 2002, thanks to 11 aggressive cuts in interest rates this year. For an assist, credit the $38 billion in early tax refunds for 2001, paid over the summer and fall. Many consumers didn't spend their $300 or $600 government checks. Instead, they paid down debt or chucked the money into savings. That leaves them better fixed to go shopping in the spring, if they're in the mood.

At press time, Santa's congressional elves were trying to cobble together yet another gift--a $100 billion economic-stimulus deal. Republicans and Democrats pushed radically different views of what constitutes "stimulus." The GOP backed big personal- and business-tax cuts. The Dems emphasized social benefits for people with modest incomes and the unemployed--and, yes, some of their donors, too. (Eartha again: "Santa, cutie, fill my stocking with... checks, sign your X.")

For weeks, both sides have been yapping as they jockeyed for political gain. With any luck, a compromise bill will emerge this week. How much stimulus it applies will depend on all its moving parts, but somebody has to make this dog hunt. Tens of thousands of jobs could hang in the balance.

At a basic level, the economy can probably right itself, without any further stimulus. In the past few weeks home sales, factory orders and some surveys of business conditions all improved. We're nine months into a recession that started officially in March (the average postwar recession has lasted almost 11 months). "The economy is within a month of bottoming out," says economist Irwin Kellner of Hofstra University in Hempstead, N.Y.

But just because business gets better doesn't mean jobs will open up. Companies are expected to keep slashing payrolls for several months more, pushing the unemployment rate to perhaps 6.5 percent from 5.7 percent today. American Express, Aetna, Kraft Foods and Applied Materials all announced major new layoffs last week.

Even if you keep your job, your disposable income may decline. Some companies are imposing pay and bonus cuts, salary freezes, even mandatory unpaid "vacations." Delphi Automotive Systems stopped matching the contributions workers make to their 401(k)s. Mortgage defaults, credit-card delinquencies and bankruptcies will likely soar. The toll will be especially deep among people with moderate incomes who feasted on easy credit during the 1990s boom.

Here's where the stimulus package comes in. To believe in early recovery, you have to assume that consumers are going to step up to the plate. But what if they want to save their money rather than spend it? What if the layoffs cut more deeply than anyone thought?

The bullish forecasters have built a boost in government spending into their economic outlook. This includes the $40 billion emergency fund, passed right after the terror attacks, and money expected from the package under dispute. In their computer models these funds get spent pretty quickly, lifting business off the pad.

But of the original $40 billion, only $20 billion has been appropriated and presumably spent, says Richard Kogan, a senior fellow at the Center on Budget and Policy Priorities in Washington, D.C. Congress hasn't yet settled on where to spend the second $20 billion (including how much more to give New York).

An early recovery--say, by February 2002--requires a boost from the stimulus package, too. Without it, "business would still turn around, but a little later than forecast," says economist Cynthia Latta of DRI-WEFA in Lexington, Mass. When growth resumed, it wouldn't be as strong as expected--meaning fewer jobs. "In a softer recovery, unemployment could keep rising throughout 2002," says Mark Zandi of Economy.com. That's the bullish-but-cautious case. And trust me--today's cheery stock-market investors wouldn't like it at all.

True bears think it will take far more time and much more government money to unwind the private borrow-and-spend bubble of the 1990s. That's a minority view today, but you never know.

One way to judge any stimulus is by how fast it puts extra money into consumers' hands. At the top of the list: mailing $300 checks to lower-income people who didn't qualify for the previous round of refund payments. Every dime would almost certainly be spent.

Congress should also extend unemployment insurance by an extra 13 weeks. Safety nets not only support a family's income, they also serve the social purpose of easing fear. A similar, good proposal would help some of the newly jobless hang on to their health insurance. As my friend the economist S Jay Levy likes to say, "Economics is not a branch of science, it's a branch of ethics."

Now we come to taxes, the heart of the argument. House Republicans turned the stimulus bill into a feeding frenzy for corporations. It's payback time and the big campaign donors are seizing their moment. There's a plausible case for short, one- or two-year tax credits that might boost business investment. But corporations are crying for permanent cuts, which would serve their shareholders more than anyone else.

The tax hawks also wanted to lower income-tax rates in the four higher brackets (excluding people taxed at 15 percent and less). They've apparently given that up but there may be a cut in the "middle-class" bracket, currently set at 27 percent for 2002. That puts more money into consumers' hands. As a permanent cut, it worsens the long-term budget outlook, too. Oh, well, it's Christmas. "Santa, honey, hurry down the chimney tonight."