Congress must act fast to fix economy - Experts

NEW YORK (CNNMoney.com) -- Washington policymakers mulling steps to jolt the economy need to strike fast if they hope to succeed, leading economists said Wednesday.

"If legislation is signed in the next two months, you're doing great," former Treasury Secretary Larry Summers told lawmakers at a hearing of the Joint Economic Committee. Measures must be implemented by spring to have the most effect, he added.

The session was the first of several planned hearings designed to assess options for easing the financial strain many leading economists forecast is ahead.

The hearing highlighted a key problem for lawmakers trying to figure out how to fix the economy: While debate over controversial tax cuts is inevitable and important, such referendum items could prevent legislators from acting quickly.

Leading economists of all political persuasions believe that the risk of recession has risen in the wake of a cascade of discouraging economic indicators - continued declines in housing, a rise in energy prices, slower-than-expected job growth and weaker-than-expected retail sales.

But predicting the chances of a recession, let alone staving one off, has long proven treacherous. Economists may agree on the need to act but differ widely on what steps to take.

One moderate counterweight to the recent down swings in economic data is that inflation pressures appeared to ease somewhat in December, giving the Federal Reserve freer rein to be more aggressive in cutting interest rates to fend off recession.

Some say the Fed - in charge of monetary policy - is the only entity with any hope of saving the economy from recession and that lawmakers should focus their fiscal policy efforts on promoting long-term economic growth rather than short-term stimulus. Summers believes both monetary and fiscal policy measures are needed.

"[Fiscal policy] is faster and shorter term," Summers said, noting that it can target Americans suffering the effects of recession such as a decline in income, job loss and rising prices. "There's enormous potential suffering we can mitigate."

By contrast, Summers added, complete reliance on monetary policy can put the economy at greater risk of inflation and sparking another investment bubble, since lower interest rates lower the value of the dollar and encourage more borrowing.

Summers argued that a two-tier stimulus package would be the best course of action. The first part would aim to put money in the pockets of consumers - between $50 billion and $75 billion in unemployment benefits, food stamp payments and tax rebates. The second part would set aside the same amount of money but only be used if economic conditions deteriorate further.

A key area of disagreement between lawmakers is how much stimulus should be directed to businesses and investors. The Democrats have said they could get behind some limited business breaks - such as allowing companies to write off more of their capital investments sooner rather than later. But they believe a stimulus package should more heavily favor boosting demand by providing temporary tax cuts and increased government spending on individuals.

"Today, the main problem is a lack of demand," Summers said.

Lawrence Mishel, president of the liberal Economic Policy Institute, also recommended that Congress earmark money toward more infrastructure spending to repair bridges, schools and water treatment systems. Noting that the unemployment rate is projected to increase this year and next, temporary public work projects could create jobs, he said.

Sen. Bob Bennett (R-Utah), who sits on the committee, said he supports more spending for repair of infrastructure but cautioned that job-creation funds should be targeted to areas of the economy experiencing labor shortages.

"You don't have a single labor market that is filled or unfilled," Bennett said. "We can do damage if we don't do things that are targeted on the ground."

Democrats also object to suggestions by Republicans that a stimulus package include legislation to make President Bush's tax cuts permanent. The tax cuts don't expire until 2011, so any action on them now would have little near-term impact, Democrats argue.

But both Bennett and William Beach, an economist at the conservative Heritage Foundation, disagreed with that argument.

They asserted that businesses and investors lay the groundwork for job creation and that economic activity could be boosted if lawmakers signal to them that the tax cuts of 2001 and 2003 will be made permanent.

"Let's not assume 2010 is so far in the future and not affecting decisions today," Bennett said.