Issue of the week: Bracing for a recession

Now even President Bush has dropped his sunny economic outlook, said Sheryl Gay Stolberg and David M. Herszenhorn in The New York Times. Just days after the government reported that the jobless rate last month jumped sharply to 5 percent from 4.7 percent,

Now even President Bush has dropped his sunny economic outlook, said Sheryl Gay Stolberg and David M. Herszenhorn in The New York Times. Just days after the government reported that the jobless rate last month jumped sharply to 5 percent from 4.7 percent, Bush acknowledged in a speech to business leaders this week that the U.S. faces “economic challenges” and that “we cannot take growth for granted.” Other administration officials sounded even less upbeat. Treasury Secretary Henry Paulson said that home

prices had yet to hit bottom, a point bolstered by a new report indicating that pending home sales fell 2.6 percent in November. Although Bush stopped short of warning that a recession looms, outside economists were less cautious, said Greg Robb in Marketwatch.com. At the annual meeting of American Economics Association in New Orleans, many economists “spoke of a recession almost as a given.”

What economy are these guys looking at? said Larry Kudlow in National Review Online. Disposable income is rising strongly, the latest auto sales report is encouraging, and “even holiday sales have surprised on the upside.” At the same time, though, the corporate sector is sending some worrisome signals. Prices for raw materials and energy are rising, and “that

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spells weakening profits.” To help companies weather this rough patch, the Fed should lower interest rates by a half-point at its Jan. 30 meeting. “A big-bang rate cut would help businesses, consumers, and mortgage owners.” At the same time, policy­makers should cool the talk of recession, which can become a self-fulfilling prophecy. This economy isn’t running aground. It just needs “a bit of help.”

That’s what I thought six weeks ago, said former Treasury Secretary Lawrence Summers in the Financial Times. But as evidence of a slowdown mounts, the debate now isn’t really over whether a recession will occur but how severe it will be. So it’s time to consider a different question: Can interest rate cuts alone restore the economy to health, or should Congress and the White House seek other remedies? I would argue for measures aimed at stimulating the economy, such as a one-time tax rebate, along with emergency steps to help the worst off, such as an extension of unemployment benefits. But whatever the stimulus measures, the key is to implement them quickly—before “the necessity of even greater ones has been unambiguously established by further pain.”

Whatever policymakers do, election-year politics will loom large, said John McKinnon and Damian Paletta in The Wall Street Journal. Congressional Democrats are already working on a stimulus plan, “putting pressure on the White House as it mulls a plan of its own.” New York Democratic Sen. Charles Schumer, for instance, favors “steps that will give lower- and middle-income consumers more confidence and more money to spend,” possibly including tax relief. The White House seems to be leaning toward tax cuts for business and the well-off. But both sides risk going overboard to score political points. “Once you start the discussion over taxes,” warns former Federal Reserve economist Vincent Reinhart, “you’re not sure how it ends.”

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