Why Washington Can't Stop Recession

Don't expect lawmakers to stave off a downturn, if that's where the economy is headed.

With stock markets skidding, job growth stalling and candidates on the trail, Democrats and Republicans entered the New Year appearing ready to work together to stoke the sputtering U.S. economy back to life.

House Speaker Nancy Pelosi, D-Calif., says she wants an economic stimulus package to be a bipartisan effort. Sources on Capitol Hill say Treasury Secretary Henry Paulson reached out to Democratic leaders, though all involved are tight-lipped about what's in the works.

Predictable. But no matter what they come up with, don't expect it to stave off a recession, if that's where the economy is indeed headed. Primaries or not, it might be the end of January before anyone knows what a stimulus proposal would even look like. If the economy contracts again in the first quarter, as it did in the final quarter of 2007, the U.S. effectively would be in a recession.

Ideas to liven things up include tax cuts, increased government spending, or a combination of the two temporarily, giving the economy some breathing room to right itself. Business groups, such as the U.S. Chamber of Commerce, are pushing for lower corporate tax rates and a tax credit for business investment.

Presumably, President Bush's stimulus plan favors targeted tax cuts. Democrats in Congress want government spending aimed at boosting economic activity by middle- and lower-income households. Appearing on CNBC Tuesday, Harvard economist Martin Feldstein, who is also president of the National Bureau of Economic Research, suggested that a successful stimulus package would be a mixture of monetary and fiscal policy: a small increase in government spending now, a rate cut by the Fed at the end of the month, plus tax cuts triggered if economic growth falls below a certain level.

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