Bush's push

“I understand the politics of economic stimulus,” said President George Bush on January 2nd. What worries some observers is whether he and his advisers have got their economics right. When Mr Bush unveils his long-promised stimulus package on January 7th, he knows he will stand accused of pandering to the rich: hence the president's insistence that he is concerned about all the people and his pre-emptive strike against those he says want to turn the package into an issue of class warfare. What concerns most economists, though, is whether the package will work—and even whether it is needed.

The Democrats have jumped on the stimulus bandwagon: indeed, so enthusiastic are they that they have been rushing to unveil their rival proposals ahead of the president. Mr Bush is certain that an extra push is needed to consolidate the sluggish and somewhat erratic recovery that has been under way since the beginning of 2002. He has his eye on two crucial American elections: that of 1992, which saw his father swept from office after a one-term presidency; and that of 2004, in which he is determined not to suffer the same fate. The conventional wisdom asserts that Mr Bush senior was turfed out because he had paid insufficient attention to the economy.

But is there a risk that Mr Bush junior is putting too much effort into kick-starting the economy? Has the case for further government intervention been convincingly made? After all, America grew at a pretty healthy pace in the year to last September, surpassed in the industrial world only by Australia and Canada. In the third quarter of 2002, the latest for which figures are available, the American economy expanded faster than any other industrial country.

Moreover, 2003 started on a high note. On January 2nd, the Institute for Supply Management said its index for manufacturing activity in December showed an unexpectedly large jump, suggesting that output grew for the first time since August and at the fastest pace since June. On January 3rd, government figures showed a modest rise in construction spending in November compared with the previous month: most forecasters had expected no change.

Overall, though, the picture remains confused. In December, figures showed that unemployment is at its highest level for eight years, and on January 2nd, figures for first-time unemployment claims also showed a rise. On the final day of 2002, The Conference Board, a private forecasting organisation, said its consumer confidence indicator had fallen sharply. Since consumers have long been the mainstay of the American economy, the prospect of weakening consumer demand—to which higher unemployment could contribute—is a cause for concern.

Even Alan Greenspan, the influential chairman of the Federal Reserve, America's central bank, has admitted that the economy has been going through what he called a “soft patch”. Fears about a possible war with Iraq and general concern about international terrorism have undermined economic confidence worldwide.

But Mr Greenspan and his colleagues at the Fed have not been idle. In the past two years they have cut interest rates aggressively: 12 times in all, most recently in November. American interest rates are now at their lowest level for more than 40 years. The Fed has made clear that it does not expect to need to make further cuts—but stands ready to do so if necessary. Interest-rate reductions take time to work through the economy and most economists reckon the full impact of the recent cuts has yet to be felt.

Monetary policy is now regarded as the main short-term policy lever. The lags with which it operates may be uncertain, and their impact difficult to forecast, but the drawbacks of discretionary fiscal policy are far greater. Disastrous attempts at fiscal fine-tuning, in the 1970s in particular, largely discredited such government intervention across the rich world.

So why is Mr Bush so keen on stimulus packages? The one now eagerly awaited is, after all, his second. The first was finally enacted early in 2002, after a battle with Congress and, especially, Mr Bush's Democratic opponents in the Senate. Aside from the obvious political desire to be seen to be doing something, the momentum behind the latest package owes much to Mr Bush's political success in the November mid-term Congressional elections. The president got much of the credit for his Republican party's unexpectedly strong performance, which saw it consolidate its majority in the House of Representatives and, crucially, recapture the Senate. Mr Bush can now be confident that his new package will get swift Congressional approval.

But clearing the political hurdles is only part of the challenge facing Mr Bush. The package still has to be judged effective—a much more daunting task. By putting forward their own proposals, the Democrats have decided to challenge Mr Bush head-on—by arguing about which specific measures make most economic sense, and which are likely to benefit the largest number of people, rather than whether a package is needed.

Two main obstacles make fiscal stimulus difficult to get right. The first is timing. It is never easy to know when action is appropriate. That's a problem with monetary policy too, of course, but if the Fed concludes that a cut in interest rates is appropriate it can implement one immediately—and can reverse it with equal despatch.

Fiscal measures are much more unpredictable even than monetary policy

That is simply not possible with fiscal policy, even with political opposition silenced. Tax cuts or government spending take time to arrange: the inevitable gap between announcement and implementation can mean the measures have lost their relevance by the time they start to have any impact—let alone by the time they have fully worked through. The risk is, for example, that such fiscal measures coincide with an economic upturn, fuelling inflationary pressures. And fiscal measures are fiendishly difficult to unwind.

They are also much more unpredictable even than monetary policy. How will individuals respond to tax cuts? By spending more readily, Mr Bush presumably hopes. But if they remain uncertain about the economic outlook because of the international security situation, for instance, or because unemployment remains high, they may instead decide to save more. While desirable in itself, more saving will not fuel economic demand—and nor will extra tax breaks for business stimulate investment if firms aren't convinced it will be profitable.

None of these issues that vex economists will matter to Mr Bush if, by election year, the economy is on a comfortable upswing. It won't then matter what contribution his stimulus package made to the recovery—and any adverse consequences, such as a rise in inflation, will probably not have materialised by then. But by seeking to take some of the credit for generating recovery, Mr Bush is also taking the risk that he will share some of the blame if things go awry. A faltering recovery, a further slide in share prices or rising unemployment could ensure that the president's intervention comes back to haunt him.