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Can government turn the economy around?

There’s no shortage of ideas for stimulating the ailing economy in this election year. But it remains to be seen how much Congress and the White House can do to help.

With economic forecasts calling for bad weather ahead, Congress and the White House have turned attention to proposals to offer Americans some shelter from the storm.

There’s no shortage of ideas in an election year. But it remains to be seen just how much the government can do to halt the continued slide in an economy battered by falling housing prices, rising energy costs and a lending slowdown caused by worries about how many more loans will go bad.

There’s little doubt the U.S. economy is slowing sharply. Economists are divided on whether the U.S. is headed for recession or already in one. But in just the past few weeks, the latest economic data have gotten worse.

The debate over a potential stiumuls package centers on what measures — if any — will have an impact.

Lawmakers have been giving the issue a high profile this week on Capitol Hill. On Tuesday, House Speaker Nancy Pelosi, D-Calif. Met with Fed Chairman Ben Bernanke talk about various legislative proposals to help bolster the Fed’s rate-cutting moves to get the economy moving again. On Wednesday, former Treasury Secretary Lawrence Summers told a hearing of the Joint Economic Committee that Congress should pass an economic stimulus bill of up to $150 billion.

"The risks here of 'too little, too late' are far, far, far greater than the risk of 'too much too soon,"' Summers told the panel.

Pelosi and Minority Leader John Boehner, R-Ohio, are scheduled to meet later Wednesday to try and lay the groundwork for a consensus on what measures should be enacted. Bernanke testifies before the House Budget Committee Thursday.

But Congress has a mixed track record when it comes to passing legislation to prop up a sagging economy, according to former Federal Reserve Gov. Lyle Gramley.

“The main reason is that it takes so long to get something passed through Congress that once it kicks in, the recession is over,” he said.

Economic stimulus generally comes from two government sources. The Federal Reserve can lower interest rates — as it has been doing since September — to promote borrowing and spending. And Congress and the White House can lower taxes or boost spending to provide an added jolt.

There’s widespread agreement that the Fed will have to do the heavy lifting to reverse the current downturn, and more rate cuts are all but certain. But those rate cuts can take months to work their way through the system and get the economy growing again.

Tax cuts or spending increases could work more quickly, said Chad Stone, chief economist at the Center on Budget and Policy Priorities, a think tank that focuses on low- and moderate-income families. But Congress and the White House are only now getting around to such fiscal measures, even though the housing recession and credit crunch have been under way for months.

Now, the political pressure to act is rising. With economic data increasingly pointing to a downturn, voters are getting more worried about a recession. Some 47.5 percent of those surveyed think a recession is likely in the next year, up from 43.4 percent in the previous month's surveyaccording to a Reuters/Zogby poll released on Wednesday.

And with the election season is in full swing, there is no dearth of proposals about what the government could do.

Republicans generally favor tax cuts and are trying to steer the discussion to the renewal of Bush administration tax cuts that are set to expire in 2010. Democrats have proposed a variety of measures to put money in consumers’ hands, including extended jobless benefits, higher food stamp payments, and aid to cash-strapped states to offset budget cuts. Another possibility is a one-time tax rebate.

On Tuesday, the Congressional Budget Office weighed in with a report saying that tax rebates like those paid out to soften the recession of 2001 are among the more cost-effective measures Congress could enact. The report also said rebates are more effective when given to middle- and lower-income taxpayers who are more likely to spend it, rather than wealthier taxpayers.

"When the economy is weak, the key impediment to economic growth is how much demand there is," said CBO director Peter Orszag. "And from that perspective what you want to do is get money to people who are going to spend it really fast."

While the ailing economy might need help right now, it is not clear how quickly a fiercely divided Congress can act. Any bill would have to work through both the House and Senate and then go through a conference committee before approval by the White House, which means nothing is likely to take effect until spring.

And when the dust settles, it’s not clear these measures will do much to prop up a faltering economy.

“For some individuals this could be important,” said Greg Valliere, chief political strategist at Stanford Group. “This could help the out them out of a very tight spot. But when you look at the economy as a whole, it’s awfully hard to see in the statistics how this type of stimulus has ever really made much difference."

The politics behind these proposals may be clearer than their potential impact. Democrats are eager to highlight the economy’s current problems and blame the Bush administration for the downturn. But Democrats who have vowed to contain federal budget deficits are wondering how increased spending or tax cuts would be paid for. Republicans seems to be taking a more wait-and-see attitude on spending. Some are warning about the negative impact of letting the tax cuts expire in 2010.

Politics aside, the economics of the current proposals are problematic in part because they don’t directly address the source of the slowdown: a housing market that shows no signs of hitting bottom.

The White House last month announced a plan to help head off a coming wave of mortgage foreclosures this year and next but conceded that only about a third of homeowners at risk would be helped. Fed Chairman Ben Bernanke said last week that lenders need to do a better job of speeding up the process of working with borrowers to head off loan defaults.

“You can lower taxes all you want and cut interest rates to zero," said Howard Glaser, a mortgage industry consultant and former HUD official during the Clinton administration. “But it’s not going to fundamentally affect the housing problems we have and bring investor confidence back unless we stop the death spiral of the housing market."

Lenders this week reported another round of losses from bad mortgages in the final quarter of 2007. Banking giant Citigroup said bad debts led to a $10 billion loss for the quarter, the largest in its 196-year history.

As more borrowers default, their foreclosed homes are being added to a glut of unsold properties, further depressing prices. Higher defaults also continue to weigh on the market for new home loans, especially large ones.

“The housing market generally is depressing the economy,” said Gramley. “We have a significant part of the credit markets that are simply dysfunctional. That’s potentially a very large problem.”

So far, consumers have held up relatively well. But there are signs that the housing recession may have begun to weigh on consumer spending, which accounts for roughly 70 percent of  economic activity. Job growth slowed to a trickle in December and more recent data show retail sales have weakened.

With house prices falling, the home equity that helped fuel spending during the housing boom has evaporated. Merrill Lynch economist David Rosenberg estimates that lost wealth could result in "a $360 billion hit to consumer spending over the next two years, which would be the equivalent of a 2 percent wage cut."

Supporters of a targeted stimulus package argue that putting money back in consumers’ wallets will help blunt the impact of that loss in wealth.

“What the anti-recession measures do is restore purchasing power that can reduce the secondary spillover effects — no matter where the recession starts,” said Stone.

If such measures are temporary, and come quickly enough, they could have some positive impact. But there’s also a risk that a “stimulus” package includes longer-term tax cuts or spending programs that don’t bear directly on boosting the economy — and only worsen the government's ongoing budget deficits.

“The question is: Is it the right medicine?” said Stuart Hoffman, chief economist at PNC Financial. “And what are the side effects if it makes the markets get more nervous about the hole you open up in deficit?”