Can Washington Boost the Economy?

Now that the Fed has used up all its ammunition, any further stimulus will be in Congress' hands.

The job of bolstering the United States' sluggish economy is now squarely in Congress’ court. The Federal Reserve recently moved to resume buying Treasury bonds in an attempt to spur economic growth, largely because the central bankers have no confidence that current fiscal policy will do the job. But its latest move is unlikely to have much impact either. And it depletes the Fed's arsenal -- there's little left that the central bank can do.

SEE ALSO: Hazards Ahead for the Economy

So it’s up to Congress to pick up the ball. Many economists say the most effective course Washington could take would be combining a short-term fiscal stimulus package with a medium-term deficit-reduction plan -- a comprehensive plan that tackles the sacred cows of long-standing entitlement programs, Social Security, Medicare and Medicaid. Here’s what such a plan might look like:

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First, it would include a moderate-size, targeted short-run fiscal stimulus bill of, say, $300 billion or $400 billion in new federal spending to spur construction and repair of roads, bridges, and other infrastructure. That would pour money into needed projects, create jobs, and phase out automatically as the projects were completed.

The second component would be a bipartisan plan for reducing the federal budget deficit over the medium and long terms by paring outlays for the major entitlement programs and raising tax revenues -- once the economy gets back on its feet, that is. This increase could be accomplished either by raising tax rates or by overhauling the tax code.

Neither piece would come together easily. Both would require major concessions by each of the parties. They would have to put their ideological stances on the shelf to fashion a compromise.

It’s a given that Congress won’t do any such thing before the election. Lawmakers already are back home campaigning, and the last thing they want is to rock the boat before voting day. Indeed, Congress just passed a continuing resolution to keep the government running through early spring, even though failure to act on other related measures -- to avoid the so-called fiscal cliff -- could push the economy into a recession. Under current law, the Bush-era tax cuts will expire on December 31 and congressionally mandated automatic spending reductions will begin to slash military and domestic outlays soon afterward. If Congress allows that to happen, it would send the economy into a tailspin in 2013.

Even prospects of a postelection deal on extending the Bush tax cuts and avoiding the automatic spending cuts mandated by last summer’s budget pact are dim, at least before the current Congress adjourns in December. And though the outcome of the Nov. 6 election will doubtless play a role, no matter which party emerges victorious, partisanship will remain intense.

If Mitt Romney wins the election, Republicans will want to stave off any action on the budget until next spring, after the new president has had time to put together his own deficit reduction plan. In fact, if Romney wins and Republicans get control of both houses, the GOP may want to block any major legislation for the first six months of the session, giving the new president time to prepare all his proposals for the Hill.

On the other hand, if President Obama gains a second term and Democrats do well in the congressional races, they might opt to let the tax cuts expire with 2012 and propose renewing them in January, but only for those earning less than $250,000 a year. If Democrats continue to control the Senate, Majority Leader Harry Reid (NV) may try to change the filibuster rules. The aim: to let lawmakers bring legislation to the floor without having to either muster 60 votes (now required to cut off a filibuster) or resort to the same tactic Republicans used to pass the Bush tax cuts in the first place -- including them in budget legislation that requires approval of a simple majority. That would open the possibility of more bipartisan legislation making it through the upper chamber. GOP lawmakers would face a choice of supporting a tax cut they don’t like or getting none at all.

A grand bargain of the sort that is necessary to rev up the economy is likely to prove as elusive in 2013 as it was in 2011 and has been this year. Instead, the odds are that the two houses of Congress will continue to kick the can down the road, doing little or nothing for as long as possible. There’s little support for a second stimulus bill, and both parties are dug in deep on the ideological front. Any proposal involving possible tax legislation or spending reductions is sure to run afoul of one side or the other. Neither will give in until the U.S. enters a budget crisis that threatens serious harm and the financial markets become unstable again. The gridlock already has spread uncertainty through the business community, impeding the recovery right now. It can only get worse.

Art Pine
Contributing Editor, The Kiplinger Letter