Will: 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.

Today's economic difficulties are novel, arising in part from new financial instruments and practices, such as the securitization of mortgage debt. In a rapidly evolving economy, which America's always is and the world's economy now is, difficulties usually are novel. Hence, economic policy is a science of single instances. Still, the past offers lessons.

In 2001, when $600 rebates were rained on American households, most people sensibly applied most of the money to savings or debt reduction. Today, with mortgage, car and credit-card debt equal to 18.7 percent of the value of household assets—a record high—rebates might again only slightly stimulate consumer spending, which is 70 percent of economic activity.

The coming stimulus will almost certainly include tax rebates because they are simple and immediately noticed. And if they do not spur demand, never mind. Nobel laureate Milton Friedman, a NEWSWEEK columnist from 1966 to 1983, finally concluded that any tax cut of any size, at any time, for any purpose, should be supported because individuals spend money more productively than governments do and waiting to cut taxes until government spending is cut is like waiting for Godot.

As Congress prepares to put its 1,070 hands on the economy's tiller, remember this: Congressional pay is not munificent, but members' compensation includes the pleasure of wielding incentives or mandates to change how people behave. So Congress relishes crises as reasons, or excuses, for expanding government's regulatory reach. People in government at all levels crave that pleasure. Consider California, that leading indicator of leading indicators. That state's Energy Commission proposes government control of temperatures in the state's homes and businesses. It advocates programmable communicating thermostats (PCTs) for use in a crisis, such as a spike in energy prices, or a shortage of energy. In a reasonably run society, the latter would cause the former, which would prompt solutions for the latter. But in Big Brother's California, the government would broadcast signals to "nonremovable" receivers in the PCTs, signals that would raise homeowners' air-conditioning settings or lower their heating systems' setting.

Washington can stimulate (i.e., enact longstanding agendas in the name of recovery from a perhaps nonexistent recession), but economic conditions on Nov. 4 may already be largely baked in the cake. Last week NEWSWEEK wondered whether 2008 would be " '92 Redux." We should be so lucky. Although Bill Clinton was elected in 1992 because voters were convinced the economy was awful, the growth rate in that year was 3.3, better than the 3.1 average since 1945.