Economics:US policy-makers have become a8cutely worried about the state of their economy. The Federal Reserve has just cut its interest rate by a cumulative 1.25 percentage points over an eight-day period, the most aggressive loosening of monetary policy in decades, writes Jim O'Leary

In the meantime, president Bush announced a $150 billion (€101 billion) fiscal stimulus package, the sense of urgency attested to in this case not so much by its size, (the equivalent of just over 1 per cent of GDP), but by its bipartisan backing in the House of Representatives.

Do these moves materially alter the economic outlook for the US in 2008? Do they materially reduce the probability of recession?

As far as the reduction in interest rates is concerned, history suggests that the resultant stimulus will not be discernible for a year or more. Monetary policy has been famously described as operating with "long and variable lags", a characterisation with which few economists would take issue.

Fiscal policy is a rather different matter. Professional opinion on its potency ranges from the dismissive to the reverential. But even those who support the use of fiscal policy accept that its effectiveness depends on precisely what levers are pulled.

A good deal of careful research has been carried out into what fiscal levers work best in the US. The findings are that the most potent measures are those that boost welfare payments, such as increasing food stamps and raising unemployment benefit. Key to the effectiveness of these measures is the fact that the beneficiaries are cash-strapped and, accordingly, are likely to spend a very high fraction of any extra income received.

The next most effective measures are those that involve lump-sum tax rebates to lower income groups. Among the least-effective measures are tax breaks for the corporate sector like accelerated depreciation allowances.

The $150 billion package just announced comprises about $100 billion of lump-sum tax rebates to individuals and about $50 billion worth of accelerated depreciation. The distribution of the former will be tilted heavily towards the better-off.

According to the US Tax Policy Centre, an independent research organisation, almost 60 per cent of the rebates will accrue to the top 40 per cent of income-earners, those most likely to save what they get, and only 20 per cent to the bottom 40 per cent, those most likely to spend the proceeds.

A considered view of the overall package, therefore, would suggest its stimulatory effect will be modest (and, of course, short-lived, since the rebates are one-off). Perhaps the result will be that GDP will end 2008 about half a percentage point or so higher than it would otherwise have been.

That the US government should provide a modest boost to economic activity at a time when recession threatens by giving some money back to taxpayers seems like an incontestable proposition. But it's not. Several fundamental objections have been raised and these shift the debate well away from the rather narrow question explored above. One is that, in the absence of a commitment to swiftly recoup the cost of the stimulus package (by, say, imposing a once-off surcharge on taxpayers as soon as the economy recovers), the burden of government debt will simply be raised and some future generation of Americans will have to pick up the tab. This seems unfair on grounds of inter-generational equity.

Another fundamental objection, articulated by former US Council of Economic Advisors chief economist Andrew Samwick in last Sunday's Washington Post, is that the stimulus package is a wrong-headed attempt to sustain the unsustainable. He is worth quoting at length: "It is ironic that additional borrowing is prescribed as the remedy for a malady that arose from unwise borrowing. In recent years, cheap credit and some imprudent lending policies generated excessive consumption and investment in the real estate sector. This boosted economic activity beyond the level that would have obtained with more sensible policies . . . If we acknowledge that bad loans fuelled the activity, why is it now a widely shared objective to maintain that level of activity?"

In the same vein, it could be pointed out that the US economy is running some serious financial imbalances (including vast trade and budget deficits and deficient household saving), the resolution of which is highly desirable and requires a significant slowdown in the growth of consumer spending. The $150 billion stimulus package will frustrate/delay this.

A similar critique, albeit from a different perspective, was offered by Stanford historian Victor Davis Hanson in a piece in the Washington Times. He called for the current economic challenges to be placed in a wider philosophical and ethical framework, suggested that a stimulus package was entirely unnecessary, and offered the following arresting observation: "There is plenty of excess in modern American life that can be shed without real hardship."

There may well be, but I suspect that this is a message that would not be warmly received by more than a tiny fraction of the US electorate.

Oh for a spell of enlightened despotism!

Jim O'Leary is a senior fellow of the Department of Economics at NUI-Maynooth. He can be contacted at jim.oleary@nuim.ie