The Stimulus Strategy.(The Talk of the Town)(Keynesian economics)

When President Bush signed into law last week a fiscal stimulus package of income-tax rebates and business tax breaks, it was the first good news for American consumers in a while. The plan will give many families a twelve-hundred-dollar windfall, and it comes with a message Americans always like to hear: we can spend our way to prosperity. Turning those checks into new televisions and T-bones, the argument goes, will keep recession away.

This is a familiar and popular idea--politicians on both sides of the aisle praised the plan--but it once seemed like heresy. In 1932, with America suffering through the Great Depression, Franklin Roosevelt, the Democratic candidate for President, attacked President Herbert Hoover for spending too much trying to fight the downturn. Hoover, he charged, was recklessly running up the deficit and driving the country toward "the poorhouse." The Democratic platform that year called for "an immediate and drastic" cut in government spending and a balanced budget.

Not for long, though. Soon after Roosevelt was elected, the nation's colossal unemployment rate and stagnant economy had him casting around for other solutions, including government-financed employment and public-works programs. At about the same time, the intellectual foundation for fiscal-stimulus plans was being laid out by John Maynard Keynes. Keynes argued that when fear made consumers and businessmen excessively cautious in their investing and spending, government could temporarily step in. Tax cuts or government-generated demand in the form of public spending could keep the country's factories and service centers humming until the "animal spirits" of consumers and businessmen rebounded.

Keynes's ideas were only halfheartedly tried during the New Deal. But after huge military spending on the Second World War--arguably the biggest fiscal-stimulus program in history--helped bring an end to the Depression, fiscal stimulus became a key policy weapon. In the nineteen-fifties, the Eisenhower Administration turned quickly to deficit spending when the economy slumped, and the Kennedy and Johnson Administrations later used Keynesian rhetoric to push for tax cuts and spending increases. In recent years, monetary policy, which works by changing interest rates, has superseded fiscal policy as the favored tool for jump-starting the economy. But when the U.S. economy stumbled in 2001 the Bush Administration quickly enacted a thirty-eight-billion-dollar tax-rebate plan.

Popular as Keynesian fiscal policy may be, many economists are skeptical that it works. They argue that fine-tuning the economy is a virtually impossible task, and that fiscal-stimulus programs are usually too small, and arrive too late, to make a difference. And since the money to pay for fiscal programs has to be borrowed and paid back ...