Most folks believe that we are nearing the end of the post-9/11 expansion in the U.S. economy. That our economy should cycle between expansion and contraction is as normal as it is uncomfortable. Expansions seem to last about seven years on average, which means that we are due (in theory) for an economic “correction.”
Since the Great Depression, policy leaders have used two tools to make sure that any downturns in our economy are as short and shallow as possible. These tools are generally referred to as “monetary policy” and “fiscal policy.”
Monetary policy is established by the Federal Reserve Bank, which is technically not controlled by politicians. Simply put, the Fed adjusts the supply of money (i.e., the “number of dollars” available for buying stuff) as well as the cost of those dollars (i.e., the interest rates we pay when we borrow from the bank or use our credit cards). In doing this, the Fed uses monetary policy to encourage or discourage economic growth.
Some people, like William Goss, think there isn't much the Fed can do this time around, as our battered banking system may not be at liberty to extend credit the way it was before the housing boom went bust. Of course, that hasn't stopped the Fed from dropping rates 1.25% in the last eight days (as of today's post).
In contrast to monetary policy, fiscal policy is what Congress and the President do together to encourage spending and/or investment. Fiscal policy is highly political, and each party ordinarily has its own ideas about how fiscal policy should or shouldn’t be used. Surprisingly, however, there appears to be real consensus that the “fiscal stimulus package” that is currently winding its way through Congress is necessary. Our elected officials clearly believe that “something” must be done in this election year – and fast.
We’re so used to bickering and sniping among our political leaders that it almost seems surreal when they stand united on something. Nevertheless, both our Republican President and our Democrat-controlled House of Representatives seem to agree that the stimulus package the House recently passed (385 votes to 35) is a good one. Although the bill needs approval by the Democrat-controlled Senate, which is taking a more deliberative approach than the House did, the Senators are feeling pressure to get something for the President to sign into law.
If the Senate makes no changes in the bill, the package would provide rebate checks to every American making at least $3,000. Most taxpayers would get checks for $600 to $1,200. Married folks with children would generally get more than others, but wealthier tax payers would not receive as much as those of more limited means. In addition to rebate checks, there would be some tax breaks to businesses to generate investment in equipment.
What’s the hold up? Well, the Senate is debating a slight reduction in the amount of each rebate check. In return, it would drop the limitation for wealthier tax payers and add funds for seniors and unemployed persons. Senator Reid, the majority leader, is shooting for a final bill by February 15th. That means our readers will probably receive some kind of tax-rebate check around July.
If you get one, what will you do with it? Will you spend it quickly? Will you pay off credit-card debt? Will you use it to plan your estate and protect your family? (Wink. Wink.) Will your check change how you feel about the economy? Will it change the way you vote in November? And what will your neighbors do with their checks?
Will any of this really matter?
Fortunately, regardless of what happens with fiscal or monentary policy, any downturn in the U.S. economy won’t last forever. No matter how bad things get, the economic future for our country is still a hopeful one. In part, that’s because we have a significant comparative advantage when it comes to national resources, including the ingenuity of our people. For those of us who tend to indulge in fretting, let’s not lose focus on our nation’s “economic glass,” which, though not overflowing, is still more than half full.
