Stirring themselves from their customary posture of inertia (motto: “Don’t just do something, stand there!”), America’s politicians have decided that it is their bounden duty to step into the breach and rescue the flatlining US economy.

With Wall Street in a full-blown slump and most indicators suggesting that a recession is already upon us, Washington has figured that the crisis is too grave to leave solely to the efforts of Ben Bernanke and his colleagues at the Federal Reserve. The fact that we are in an election year and candidates from both parties are competing in a demented auction of fiscal stimulus packages (“Do I hear $200 billion and a bailout of the entire mortgage market?”) is adding a certain political urgency to the process.

Last week it became clear that President Bush was going to spend much of his final year in office doing what he did in much of his first — pushing Congress to pass a sizeable package of tax cuts designed to lift the economy out of recession.

You can understand the man’s alarm. As though his legacy were not tarnished enough already, there’s a real chance that if things don’t get better quickly he will be remembered for a presidency that botched a war and nearly lost an American city to a hurricane, neatly sandwiched between two slumps. It will make Herbert Hoover look like George Washington.

Not that either recession was his fault, of course, but history can be cruel like that. Politicians can do little to expand the business cycle, but they get the blame anyway and everybody expects them to do something when trouble strikes.

Mr Bush’s plan is remarkably similar to the one he launched in 2001 within days of taking office, when the economy was struggling with the burden of the collapse of the dot-com boom.

He wants the Internal Revenue Service to mail out rebate cheques to all taxpayers. The Administration hasn’t publicly put a number on the plan yet, but officials say they are thinking about $800 for individuals and $1,600 for families. In total that would inject about $150 billion (£77 billion) into the US economy. That represents about 1.2 per cent of gross domestic product, a not insignificant amount. If Congress can get its act together, that would be in people’s pockets some time over the summer, perhaps just as the slump is really starting to hurt.

Democrats, who control Congress, are not convinced. They don’t mind the rebates but they want them to be targeted more at lower-income families. A proposal doing the rounds on Capitol Hill would reduce or eliminate the rebate for people earning more than $85,000 a year. It would also find ways to get money to people who pay no taxes, as they would gain nothing from a rebate. Democrats also want to increase spending, perhaps with some money aimed specifically at the moribund housing market.

There’s more than just the usual class warfare rhetoric about this battle. Empirical economics suggests that lower-income families and those with incomes too low to pay taxes are much more likely to spend money than higher-income groups. If you’re earning more than half a million dollars a year, chances are you’re just going to save an extra $800 or $1,600, providing no initial stimulus to overall demand. If, however, you’re struggling to make ends meet it’s likely that you will spend all of the rebate, with all the beneficial second-round effects on aggregated demand that involves.

Furthermore, economic theory also says that increased public spending is more efficient as a stimulus than tax cuts. Good, old-fashioned Keynesian economics holds that, again, since government spending goes straight into domestic demand, you get more fiscal bang for the buck than you do through tax reductions, where a sizeable part of the stimulus “leaks” into higher savings and more spending on foreign imports.

Strangely, until 2001, the whole idea of fiscal stimuli, of fine-tuning the economy, had gone the way of much of the 1960s Keynesian economic consensus. Almost everyone believed it was better to leave short-term demand manipulation to monetary policy and interest rates. It was believed that the fiscal side — other than through the work of “automatic stabilisers” (the fact that tax revenues fall and spending increases naturally during downturns) — should focus on long-term stability.

Yet the experience of that first round of Bush tax rebates seven years ago tells us that there might be a case for tax-cutting as part of a fiscal stimulus. Economists at Princeton University, the University of Pennsylvania and the US Labour Department found that the effect of those rebates, worth $300 for individuals and $600 for families, lifted domestic demand by about 0.7 percentage points in the second half of 2001. Not enormous, but not negligible, either. It seems that the advantage of a rebate over increased spending is that, unlike government expenditure, rebates get money into the economy straight away. Building bridges and roads takes time.

And it should be noted that, unlike the British Government, the US is at least in reasonably healthy fiscal condition and can afford a little bit of fiscal easing. The federal deficit is only a little more than 1 per cent of GDP in the US, well below the 3 per cent figure in the UK.

So bring on the tax cuts. They won’t avert a recession or even stop one that has started. But they can ease the pain a little at relatively low cost. In these days of diminished expectations, that’s about as much as anyone dare hope for.

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