AMERICA'S POLICY MAKERS

have a plan to liven up the economy. It is a tragicomic one, akin to applying shock paddles to a patient who is quietly recovering from the flu. If the plan fails, it will create waste. If it works, it will produce something worse.

Let's review the patient's symptoms. American share prices have spent the past 135 years at an average of 15 times company profits, but for the past 20 years have fetched an average of 22 times profits. Since October prices have fallen 14%. Tuesday they fell back to average: 15 times profits. House prices have fallen, too, by 6.7% during the year ended October. That's the largest decline in 20 years, but nowhere near large enough to bring houses back to their historic ratio of prices to rents, or prices to incomes.

The dollar is falling, too. It's down 21% in five years vs. a trade-weighted basket of foreign currencies. Americans owe plenty and save little. The ratio of consumer debt to income has increased 30% over the past two decades. Americans now stash away less than 1% of discretionary income, vs. double-digit rates two decades ago.

Unemployment figures are tricky to read right now because of the seasonal hiring and firing that occurs around holidays. December's jobless rate jumped to 5%, a two-year high, but the number of people filing for benefits last week hit a four-month low.

I'm ready for a diagnosis, and you might be, too. America has a simple case of reversion to the mean. Its shares have become affordable for the first time since investors my age (35) began buying them. Its houses are on their way. Merrill Lynch forecasts a 15% drop in prices in 2008, followed by a 10% drop in 2009. (That might be pessimistic, since price declines for houses are less common than prolonged periods of flat prices giving incomes a chance to catch up.)

The profit decline is a return to normalcy, too. Corporate profits in 2006 reached their highest share of economic output in 40 years, a sign of overspending and of record lending profits amid a surge in asset prices. The dollar's value is more corrective than causal. America's trade deficit the amount by which its purchases from foreigners exceed its sales to them has increased sevenfold in a decade. A cheaper dollar helps to close this gap by discouraging imports and aiding exports. Indeed, during the third quarter of last year, overseas profits of American companies grew 20% year-over-year, according to Bank of America.

What the patient needs is to be left alone. Spending will slow, debts will be paid down, assets will become affordable and the dollar will reflect this progress. If a stimulus is needed, how about reducing corporate taxes? America's companies pay the second-highest or fourth-highest share of profits among developed nations, depending on who's doing the math. Surely a tax cut for them would spur hiring and increase incomes. That might lead to an affordable increase in spending, and to a rise in stock prices justified by a rise in profits.

The fiscal doctors see things differently. What Americans need, they reckon, is more borrowing to fuel more spending, and fast. On Tuesday morning, eyeing stock futures that pointed to a likely plunge in that day's share prices, the Federal Reserve announced its biggest one-day reduction in the nation's benchmark interest rate in two decades. The timing is peculiar, since rate cuts are typically announced at scheduled meetings, one of which was only a week away, and since the Federal Reserve Act tells us that monetary policy is meant "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," and not necessarily to make stock traders cheer. Later Tuesday, lawmakers and the president announced a big stimulus plan: $150 billion in "tax rebates" and such.

The Fed's actions are designed to make borrowing less expensive. The government plan takes things a step further by borrowing on the taxpayer's behalf. The $150 billion will bring the federal budget deficit this year to some $400 billion, or $2,800 per taxpayer. That, in turn, will be added to the $36,000 per taxpayer that the government already owes (not counting amounts owed by one arm of the government to another), a figure that has increased by $11,000 since 2002.

At best that money will be wasted. At worst it will lead to another unjustified run-up in shares and houses, making long-term investing and homeownership artificially expensive.

Does anyone else feel a little over-stimulated right now?