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Valliere: Massive Economic Stimulus May be Ready by Inauguration

As the U.S. economy spirals into a deepening recession, you'd expect Washington to respond immediately with massive fiscal stimulus. Incredibly, it's not going to happen any time soon.

Never was the expression "lame duck" more appropriate. This very lame session of Congress has produced little more than bickering and posturing, which means the heavy lifting will have to wait until January.

Economists usually don't agree on much, but there's an overwhelming consensus that the economy needs a huge stimulus — at least $500 billion — and needs it immediately. GDP this quarter could contract by 5 percent, and the first quarter doesn't look much better.

All we expect from the lame duck session is a grab-bag of modest stimulus such as an extension of food stamp and unemployment benefits, perhaps some modest aid to the states, and some other odds and ends such as an extension of higher GSE and FHA loan limits.

The media has focused in recent days on the pressing need to aid the auto industry, but both management and the unions are in such disfavor that a rescue package looks unlikely in the lame duck session.

More Economic News:

  • Fed Slashes Economic Outlook Through '09
  • Stimulus Plan Unlikely this Year

Aid to Detroit and other major assistance seems very likely in January. The buzz on Capitol Hill is that once Congress is sworn in on Jan. 6, work could begin immediately on a stimulus package.

Incredibly, a stimulus deal could be just about finished by the time Barack Obama is inaugurated on Jan. 20; his economic advisers already are planning to move quickly with the new Congress.

The main feature of the deal, by far, will be huge middle class tax cuts. Many of our sources are reporting that it may come via a cut in the Social Security payroll tax, not a cut in individual tax rates.

A big payroll tax cut could get stimulus into the economy immediately by late winter, which increases prospects that the financial markets will conclude that the worst of the recession may be over by the end of the first quarter.

Some improvement in the economy by spring is an increasingly decent bet, and at some point — maybe within a few weeks — the markets may begin to anticipate that.

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Greg Valliere is the chief strategist at the Stanford Washington Research Group, and was previously Managing Dirctor and Chief Strategist with the Schwab Washington Research Group. He is a regular CNBC contributor.

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