history repeats itself...until it doesn't...

["Ian Murray" <seamus2001@xxxxxxxx>]

[NYTimes]
November 5, 2001
Staving Off a Recession When Only Old Scripts Are at Hand in a New Age
By RICHARD W. STEVENSON

WASHINGTON, Nov. 4 - With daily doses of bad economic news pointing to
the first recession in more than a decade, government policy makers
face increasing questions about whether they have the resolve and the
proper tools to bring about a quick recovery.

Just as the terrorist attacks required the United States to fight a
new kind of war, economists said, the government faces an economic
downturn that does not match previous scripts and that so far has not
been particularly responsive to the combination of tax cuts and
aggressive interest rate cuts by the Federal Reserve Board.

Yet while the economy seemed to be crumbling from the delayed effects
of a one-two punch - the bursting of the 1990's bubble followed by the
terrorist attacks on Sept. 11 - Washington was dithering.

Even as the latest statistics showed that the economy had contracted
over the summer and that unemployment had surged by half a percentage
point in October, to 5.4 percent, the two parties in Congress and the
Bush administration sank more deeply into an ideological bog over how
to respond.

Republicans pushed their plan for another round of tax cuts that would
largely benefit companies and upper-income people. Democrats pressed
for an approach that would give most help to the unemployed and those
with lower incomes, and would rely in large part on increased
government spending.

President Bush repeatedly called on the parties to bridge their
differences and act but offered no new proposals of his own and
defended his focus on tax cuts.

By the end of the week, they were clearly aware that their inability
to get something done left them at risk of being seen as part of the
problem rather than part of the solution.

"We're seven weeks after the event," said Richard J. DeKaser, chief
economist at National City Bank in Cleveland, referring to the
attacks, "and they're still debating."

"It is getting late," Mr. DeKaser added.

It is not just Congress and the administration that are under
pressure.

On Tuesday, the Federal Reserve will meet, and analysts are almost
unanimous in predicting that it will cut rates for the 10th time this
year. The Fed has already slashed its benchmark federal funds rate on
overnight loans among banks to 2.5 percent from 6.5 percent this year
in an effort to stimulate economic activity by reducing borrowing
costs.

Interest rate policy works with long lags, and many analysts said the
Fed would ultimately prove as effective as ever, a position also held
by Alan Greenspan, the Fed chairman. But so far the rate cuts have not
had as much effect as expected, some economists said.

In any case, they said, lower rates may not be the right remedy for
the economy's major problem: overinvestment by businesses in
computers, telecommunications equipment, machinery and other capital
goods.

With demand for their goods and services eroding rapidly, companies
are unlikely to borrow to finance more capital spending no matter how
low interest rates go.

"It's a very different business cycle," said William Dudley, chief
domestic economist at Goldman Sachs, the investment firm. "It's an
investment boom-bust cycle, and the bust that's followed the boom has
created significant imbalances that will take time to be corrected and
that are not easily remedied by monetary policy."

Just how different a cycle this is will be determined in part by how
far-reaching the aftereffects of the terrorist attacks prove to be.

Already, policy makers are trying to determine how much effect fear of
further attacks and concerns about a drawn-out war will have on
consumer and investor confidence.

They are examining whether the improvement in recent years in
productivity, or business efficiency, will be wiped out by the costs
of tighter security and less reliable transportation. And they are
waiting to gauge the effects of a likely worldwide recession while
speculating about the possible effects of further potential economic
shocks like a sharp rise in oil prices.

Publicly, administration officials continue to be upbeat, holding out
the possibility that the economy could avoid a technical recession by
growing in the fourth quarter and suggesting that in any case the
recovery is likely to come fairly quickly next year.

"It's too early to tell" if the United States is in its 10th recession
since World War II, said R. Glenn Hubbard, the chairman of the White
House Council of Economic Advisers.

Mr. Hubbard said the onset of this problem was atypical in that it did
not originate in an often repeated pattern in which inflation gets out
of hand and the Fed overreacts by pushing interest rates too high.
Inflation this time around has been almost dormant.

Yet if the onset of the problem has been different, Mr. Hubbard said,
it is nonetheless playing out in a classic pattern, with weakness
spreading from manufacturers through the rest of the economy. There is
no reason to think the economy will not also recover as it typically
does, he said.

"The dynamics of recovery are likely to be fairly similar to what
we've seen before," Mr. Hubbard said. "I have no reason to believe
policy won't be very effective, both monetary policy and fiscal
policy."

The policy choices on the table in Washington are fairly orthodox.

Republicans say cutting taxes on companies will reduce pressure on
employers to slash jobs, create an incentive to buy equipment soon
instead of delaying and help restore confidence and wealth by
supporting corporate profits and stock prices. Cutting all income tax
rates, even for the wealthy, would have much the same effect by
encouraging job creation and hard work.

The point of an economic stimulus package, said Senator Trent Lott of
Mississippi, the Republican minority leader, is "not to give folks a
check for today, but to give them a job for tomorrow."

But Democrats said there was no higher priority in a downturn than
helping unemployed people put food on the table or maintain their
health insurance. If taxes are to be cut, they said, the main
recipients should be Americans with low and moderate incomes.

"We should be helping those who need it the most, not those who need
it the least," said Senator Tom Daschle of South Dakota, the
Democratic majority leader.

To the degree that there is any thinking outside of the political box,
it is coming from the ideological wings. Conservative supply-siders
want far more sweeping tax cuts than anything getting serious
consideration in Congress. Liberals want public-works-style spending
packages, everything from child care to highways, with a particular
focus on projects that could help improve domestic security.

Politically, tensions continue to run high. In the latest twist,
Republicans have started turning on Mr. Bush's point man in
negotiating a stimulus package, Treasury Secretary Paul H. O'Neill.

Enraged by a public suggestion from Mr. O'Neill that the tax-cut bill
the House passed last month was "show business," intended more as a
political statement than a serious policy proposal, some conservatives
have called for Mr. O'Neill to resign.

Asked last week whether Mr. O'Neill should stay on, Mr. Lott said,
"That's the president's decision," and added that Mr. O'Neill "needs
to be careful with how he says what he believes."

The Senate Finance Committee had tentatively planned to push through a
Democratic stimulus plan this week. Then Republicans said they might
file as many as 72 amendments to the bill in an effort to tie it up in
the committee. It is still unclear how the logjam will get broken.

Analysts said public pressure will ultimately motivate the politicians
on both sides to stop squabbling and come up with a credible response
to the deterioration of the economy.

Kim Wallace, a political analyst at Lehman Brothers, the investment
firm, said people have been willing to give Congress and the White
House a reasonable amount of time but are now growing impatient.

"That reasonable period has been overextended in the eyes of most
people," Mr. Wallace said. "It only feeds into the notion that
Washington has outlived its usefulness at this stage in the crisis,
and that's a dangerous place for an elected member to be a year out
from an election."