US Moves May Be Too Late To Tame Recession

Source : The Business Times, April 7, 2008

Of 8 postwar recessions, only once was stimulus package passed before recession ended

(WASHINGTON) If history is a guide, US government efforts to combat recessions often come too late to do much good. Furthermore, such efforts can sow the seeds for the next downturn.

The news last Friday that the economy shed 80,000 jobs in March, the worst loss in five years, triggered a wave of hand-wringing, fault-finding and proposed fixes in Congress and in the presidential campaign. The jobs report added to a building consensus that the country has slipped into recession, one that may have begun early this year or in late 2007.

Yet past efforts to head off or alleviate recessions with crash spending programmes and tax rebates, classic anti-recessionary plays, often did not kick in until after the recession had ended.

‘History shows very often that these programmes even go on for years and years after the recession is over,’ said economist Bruce Bartlett, who worked in the 1980s administrations of Presidents Ronald Reagan and George H W Bush.

Of the eight US recessions in the six decades since World War II ended, only once was the stimulus package passed before the recession’s end, Mr Bartlett found. That was legislation enacted in June 2001 that contained the first round of President George W Bush’s tax cuts - to combat a recession that began in March 2001 and ended in November 2001. ‘That would be the rare case,’ Mr Bartlett said.

In the seven other postwar recessions - Nov 1948-Oct 1949, Aug 1957-Apr 1958, Apr 1960-Feb 1961, Dec 1969-Nov 1970, Nov 1973-March 1975, July 1981-Nov 1982, and July 1990-March 1991 - stimulus packages were either passed just as they were ending or considerably later.

Part of the reason for the mismatches, besides usual congressional delay, is because it often is not known for months, even years, when a recession officially begins and ends. Two consecutive quarterly contractions in the gross domestic product is the common definition. But the official determination, made by the National Bureau of Economic Research, takes longer and is based on a more complicated formula.

It is still too early to know the impact on the economy of the US$168 billion stimulus package passed by Congress and signed by Mr Bush in January. Rebate cheques of up to US$1,200 per couple and even more for families with dependent children will start arriving in mailboxes in May. Mr Bush has argued against additional stimulus packages.

The Federal Reserve, the US central bank, also has anti-recessionary weapons at its disposal, primarily the ability to lower short-term interest rates and inject more liquidity into the financial system. The Fed has dropped rates a full 3 percentage points since September to 2.25 per cent. Studies show it takes nine to 12 months for Fed rate cuts to affect the economy.

The central bank recently took extraordinary steps to calm financial markets from a panic triggered by mortgage defaults, including arranging the US$29 billion rescue of investment house Bear Stearns, and offering hundreds of billions of dollars in new emergency loans to investment banks and other financial institutions.

The new jobs report shows a loss of jobs so far this year of 232,000 and a jump in the unemployment rate to 5.1 per cent from 4.8 per cent. That puts the Fed under pressure to cut rates further and to do more to calm jittery markets. But there are limits to how much more it can do.

It probably is too late to do much else that will help, either by the Fed or by Congress, to keep the recession from ending earlier than it will on its own, said David Wyss, chief economist at Standard and Poor’s.

The US$168 billion package will help a bit, Mr Wyss said. ‘Otherwise, the usual pattern is that by the time Congress does anything, you’re back in the recovery phase, and you end up boosting the recovery too much. And creating the seeds of the next recession,’ he said.

Still, Alice Rivlin, former director of the Congressional Budget Office and later deputy Fed chairwoman, said the government has been quite successful in recent years in mitigating the severity of recessions. ‘We haven’t had a really bad one in quite a long time. We have a lot more tools now, and the economy is more flexible than it used to be,’ she said.

Chris Edwards, director of tax policy for the libertarian-leaning Cato Institute, cites an unquenchable thirst in Washington to find quick fixes for hard times, and that is even more pronounced in an election year. ‘Congress and the administration want to be seen as doing something, and the politicians on the campaign trail are going to be promising even more.’

As if on cue, Republican John McCain and Democrats Hillary Rodham Clinton and Barack Obama all issued statements decrying the job losses, and offering their competing remedies, within an hour of the bleak Labor Department employment report’s release. — AP