IN nine days the president of the United States will share with a joint session of Congress his view of the State of the Union. George Bush will assure the Congress and the television audience that the American economy is basically sound, but in need of a bit of help. Indeed, by the time the president faces both houses of Congress, the members of the Supreme Court, leaders of the military establishment and assorted invited dignitaries, he will have agreed the details of a fiscal stimulus package with the Democratic opposition.

All doubt that such a package would be proposed evaporated when the Federal Reserve Board chairman Ben Bernanke late last week gave Congress a rather down-beat report on the state of the economy. He made it clear that in response to his new, sober economic outlook he would cut interest rates. But like murderess Velma Kelly in Chicago (played in the film by Catherine Zeta-Jones), he sang “I simply cannot do it alone”. So he called for a fiscal stimulus to supplement his easier monetary policy.

He knew he could count on support from Treasury secretary Hank Paulson, who has abandoned his earlier view that problems in the sub-prime mortgage market will not affect other sectors. Paulson now is privately sharing Bernanke’s worries that America faces more than a moderate downturn. Both incoming data and what he must be hearing from his former colleagues on Wall Street, many in a panicked hunt for equity capital from sovereign wealth funds, provide ample reason for sleepless nights.

The president is in no position to confine himself to a statement that “prosperity is around the corner”, as Herbert Hoover assured the country in 1932, when the Great Depression was taking hold. Nor does he want to be seen as out of touch with “ordinary working folk” or uncaring, as Bill Clinton painted Bush’s father before evicting him from the White House after a brief and mild recession. So he returned from the Middle East last week to negotiate with congressional Democrats the details of a stimulus package.

Unusually, both the president and the Democrats agree on enough principles to make what Winston Churchill always demanded – “action now” – a reality. They agree with Bernanke that it is essential to put “money into the hands of households and firms that would spend it in the near term . . . Getting money to low and moderate-income people is good, in the sense of getting bang for the buck”. So Bush, who believes that a similar measure helped the economy snap out of a recession early in his term, will sign on to a plan to cut taxes by $1,600 (£818) for every taxpaying family and $800 for single taxpayers. To this the Democrats will add families and individuals whose incomes are so low that they do not pay income taxes.

We are all Keynesians now: the theory is that this demand-side boost will get consumers off their couches and back into the malls. Economists are less certain that these payments will indeed be spent or, if spent, are significant enough to push the economy forward, but politics trumps economics even more than usual in this election year.

The package, which will pass in a few weeks, will also include a variety of measures to stimulate business investment and hiring. But it definitely will not include the item that is on the top of the president’s wish list, extension of the tax cuts that are due to expire in 2010. All in all, when the final touches are put to the plan, its total cost is likely to come to some $150 billion, a figure Bernanke considers at the top end of a reasonable range, but not certainly enough to matter much in the $13 trillion American economy.

The expenditures will be temporary. Bernanke is expecting the economy to begin recovering later this year, or early in 2009, at which time the stimulus will have done its work, and will expire. To add a bit to the budget deficit for a short time is one thing, and quite acceptable; to add permanently to the structural deficit is not. So in addition to quick, the stimulus will be temporary.

The outbreak of bipartisanship has forced the sceptics, most of whom are on the Republican side of the aisle, to keep their doubts to themselves, “straight talk” John McCain excepted. In this election year most are disinclined to make public the three doubts they quietly express in private. First, it is not certain that these sorts of packages actually have an effect on the economy. Second, by cutting interest rates and showering money on consumers Bernanke and the politicians are simply postponing an economic adjustment that will in the end be necessary to reduce reliance on debt. It is becoming received wisdom that Alan Greenspan brought on the problems we now face by keeping interest rates too low, for too long, in order to overcome the several crises he faced during his long tenure at the Fed. Washington is not noted for long-held, fond memories of the achievements of departed icons.

Most important, despite the scare-mongering headlines, the opponents of the stimulus say the situation hardly warrants panic. The much-reported losses of Wall Street financial institutions now total about $100 billion, or 0.7% of gross domestic product (GDP).

The Wall Street Journal notes that losses “from savings and loans [banks in the business of mortgage lending] and related commercial bank loans from 1986 to 1995 were about $189 billion, or 3.2% of average GDP in that period”. The losses of the savings and loans alone came to more than 2.5% of GDP.

But politics trumps economics. The package will pass. So will the downturn, allowing the politicians to claim credit, deserved or not.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

stelzer@aol.com

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