For his part, President Bush wants to stave off recession by sending even bigger checks to everybody. In the coming days, politicians will no doubt continue to tell us how they intend to save the economy by sending some or all of us checks.
But the real debate about stimulus packages ended yesterday morning, and Fed Chairman Ben Bernanke won.
In light of plunging Asian and European stock markets, the Federal Reserve yesterday slashed interest rates a dramatic 75 basis points, the biggest cut in over 20 years. In a sane world, this should preempt further political performance art in the name of fiscal stimulus.
The idea behind fiscal stimulus is that if consumers suddenly come into a chunk of money, they’ll turn right around and spend it, goosing the economy. But in reality, many people just sock that money in the bank, which doesn’t help anybody but them.
What’s more, a stimulus plan of even $100 billion is just a small drop in the massive bucket of a $13 trillion U.S. economy. And the sluggishness of the political process all but guarantees that too little will come too late.
In contrast, a Fed rate cut happens immediately — it’s in effect right now. And the looser credit and spending it’ll generate will likely dwarf any of the proposed fiscal stimulus packages. Most importantly, the historical record of lowering interest rates to spur investment and borrowing is relatively strong.
Of course, we got into this mess in the first place from easy credit, and we ought to be careful that the rate cut doesn’t set up the next cycle of exhilaration and misery.
That said, the fiscal stimulus sweepstakes was never anything more than pandering political theater. It’s probably too much to hope for Bush, Clinton, Obama and company to give their plans the hook. But a politician with honest economic sense would acknowledge that Bernanke just closed the curtain.
Will Wilkinson says the Fed wins the stimulus debate on Marketplace (January 23, 2008) [Real Media, MP3]