The release of dismal national jobs data on Jan. 4 has prompted rumblings from politicians in Washington about the need for an "economic stimulus package." On Jan. 7, President Bush and Treasury Secretary Henry Paulson delivered separate speeches on the state of the economy, in which they addressed the basic outlines of a fiscal policy designed to mitigate the effects of a possible recession. Bush announced he is taking a stay-the-course approach while economists from across the political spectrum are calling for some type of stimulus package. The president could still offer a plan in his State of the Union speech at the end of January.

During his speech at the Union League Club of Chicago on Jan. 7, Bush reiterated the importance of continuing his current policies to address what he calls recent economic "challenges." However, he emphasized that new initiatives are unnecessary to address the damage from the housing and financial crises. Bush called for extending his first-term tax cuts, few of which, if any, would have any impact on current economic signals.

Meanwhile, Paulson, in his speech before the New York Society of Security Analysts, Inc., said the administration would consider an economic stimulus package but would not provide any details. This is why some speculated that Bush might announce something during the State of Union address.

In order for an economic stimulus to be successful in its goal of shortening — or even preventing — a recession, it must quickly put money into the hands of individuals most likely to spend it. According to the Bureau of Economic Analysis, the U.S. economy is primarily driven by consumer spending, which accounts for approximately two-thirds of the economy. Thus, if there was a stimulus that incorporated tax cuts, it should be targeted to low- and middle-income families, who not only would benefit most from an increase in their take-home pay in the face of rising health care and energy costs, but would also be most likely to spend the money immediately. Extending the Bush tax cuts, which largely benefit the wealthiest in the country, would have little stimulative impact, even if they could be felt immediately.

While individual saving and investing are desirable goals of fiscal policy, they would do little to provide short-term and immediate economic stimulus. Writing in the Financial Times, Harvard University professor and former Clinton Treasury Secretary Larry Summers stated, "[P]oorly provided fiscal stimulus can have worse side effects than the disease that is to be cured." He believes policymakers should design a stimulus package with the following characteristics:

• Timeliness: The package should be enacted by the middle of 2008, and its benefits should be felt immediately.
• Targeted: Tax spending should be directed at low- and middle-income families whose incomes have recently fallen and who would benefit the most from a tax cut.
• Temporary: A tax cut that increases the deficit for more than one year will be counterproductive, as the resulting upward pressure on long-term interest rates will attenuate the Federal Reserve Bank's ability to stimulate the economy through monetary policy.

While tax cutting can nominally fall under the rubric of "fiscal stimulus," not all cuts are the same: A $100 billion deficit hike can be more or less effective depending on how the tax cuts are designed. In his Jan. 7 column in the New York Times, Princeton economics professor Paul Krugman notes the contradiction in rhetoric the Bush administration has deployed in defense of its fiscal policies.

[U]ntil just the other day Bush administration officials were in denial about the economy's problems. They were still insisting that the economy was strong, and touting the "Bush boom" — the improvement in the job situation that took place between the summer of 2003 and the end of 2006 — as proof of the efficacy of tax cuts.

As a series of charts on Krugman's blog illustrates, the Bush tax regime has not been a stellar jobs creation program.

Congressional Budget Office Director Peter Orszag underscored the importance of the duration of budget deficits when, as co-director of the Brookings-Urban Tax Policy Center, he said, "I want to emphasize at the beginning that temporary budget deficits can be beneficial in providing a jump start to a weak economy. Ongoing, sustained budget deficits are a different story…. The bottom line is that a larger budget deficit and lower national saving today reduce income in the future."

It is important that policy makers ignore calls for a repetition of the failed 2001-2003 Bush tax cuts and adhere to sound economic principles as described by Summers and Orszag. Even worse would be calls for extension of those same tax cuts as a short-term solution for current fiscal problems. Permanent tax cuts for the wealthy and corporations would do little to immediately stimulate the economy or direct economic aid to those most affected by an economic slump while ultimately putting a drag on the economy in the long term through sustained budget deficits.

At this point, Democratic leaders in Congress have not put forward a stimulus plan. However, there has been discussion that such a plan might incorporate targeted, short-term tax cuts combined with targeted, short-term spending increases. With Congress returning prior to the State of the Union speech, it is expected that Democrats will begin advocating for a stimulus plan of some type.