With evidence mounting that the nation is headed for a recession, Republicans and Democrats this week battled over the best way to boost the ailing economy. The issue took on new urgency in the wake of several reports pointing to sharp economic decline. The unemployment rate took its biggest jump since 9/11, manufacturing fell to a five-year low, and consumer spending, which had been stubbornly resilient, is starting to sag. The Dow hit its lowest mark in nine months, after investors were rattled by news that Citigroup posted a $9.8 billion loss in the fourth quarter—a stark reminder of the troubled housing market. “There is certainly enough out there to make people worry,” said Standard & Poor’s chief economist David Wyss. “We think we are getting very close to a recession.”
Federal Reserve Chairman Ben Bernanke would not directly say he believes the economy is sliding into recession. But he did speak darkly of “slow growth” and “downside risks,” while signaling that the Fed would again lower interest rates later this month—perhaps by a half-point. But the White House and lawmakers indicated rate cuts might not be enough. President Bush suggested he would propose a package of tax cuts in his State of the Union address on Jan. 28. Congressional Democrats, working on their own stimulus package, were focused on increased federal spending.
What this economy needs is “an immediate spark,” said Thomas E. Nugent in National Review Online. And nothing accomplishes that like a big tax cut. It worked before. Bush’s 2002 tax cuts kept the economy chugging for six years, by putting more money in consumers’ hands. Another tax reduction “could make the difference between a prolonged downturn and continued expansion.”
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There they go again, said Paul Krugman in The New York Times. Republicans once claimed that tax cuts were what made everything so rosy. Now that they’re forced to admit the economy is sputtering, the solution is—tax cuts. In truth, any serious attempt “to reduce middle class insecurity and inequality will have to mean higher taxes on the affluent.”
Everybody take a deep breath, said the Chicago Tribune in an editorial. It’s not certain that a recession is imminent; the Fed’s rate cuts should be given a chance to work before we cut taxes or increase spending. A hastily assembled stimulus package might not do anything but drive up the deficit. “The risks of rushing to the rescue are at least as great as the risks of holding off.”
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