By Katherine Skiba
It took only 13 words from Fed chief Ben Bernanke to signal that another shot in the arm for the faltering U.S. economy may be coming. As congressional Democrats push for a boost aimed at Main Street costing at least $150 billion, the public face of the nation's central bank recently threw his considerable weight behind a 'significant' stimulus measure in typically understated fashion. 'Consideration of a fiscal package by the Congress at this juncture,' Bernanke said, 'seems appropriate.'
The Federal Reserve Bank chairman shied away from the 'R' word--recession--but his grim outlook placed Congress front and center again as policymakers grapple with the kind of global financial tremors unknown since the Great Depression. The pressure is even greater as it becomes clear that bailout packages of more than $1 trillion for big banks and Wall Street giants have not worked overnight. Urgent calls for more spending are met by angry words about a runaway deficit, ballooning in part because of massive bills for ongoing wars in Iraq and Afghanistan.
Now, lawmakers are trying to assemble legislation to target billions of dollars at people who are hurting--those who 'live on Main Street and all the side streets,' as one Democrat put it--as well as states struggling with budget shortfalls. There's also talk about an infusion that would finance infrastructure projects, providing they could be launched fast enough for the big bucks they'd cost to have instant economic bang.
In the mail? But don't count on Uncle Sam mailing any more $600 tax rebate checks just yet. Rebates remain under discussion, but their likelihood seems iffy after studies showed that many of the people who got the checks beginning in April--thanks to a $168 billion stimulus package Congress approved in February--stashed the money in savings or tackled credit card debt. Those who hit the malls 'spent money on products made in China,' complain lawmakers, including Sen. Judd Gregg of New Hampshire, the top Republican on the Senate Budget Committee. Gregg expects to oppose a new stimulus out of concern over the exploding deficit, which just hit a record $455 billion. Democratic Senate Majority Leader Harry Reid advocates a stimulus, and Gregg, despite his reservations, expects Congress will pass one in a lame-duck session in mid-November.
The size of the package is fluid--somewhere in the range of $150 billion to upwards of $300 billion--but aides to Democratic House Speaker Nancy Pelosi, a leading proponent, are quick to say it most likely will be on the lower end. 'The need for this package is undeniable,' Pelosi argues, noting that nearly 800,000 jobs have been lost this year, with 159,000 in September alone.
For Pelosi to succeed at what she's ceased calling a stimulus--an 'economic recovery package' is her preferred language--she'll have to stare down deficit hawks, some in her own party, and take on Republicans who bristle at the prospect of a spending bonanza. Instead, they prefer tax cuts and other incentives to spur business and investment. GOP Minority Leader John Boehner has dismissed the effort as 'pork-barrel spending masquerading as stimulus.' Others caution that extending unemployment benefits gives people a reason not to look for work and that bailing out foundering states rewards those that made bad choices.
For months, Pelosi and her allies have pushed for a second stimulus following the $168 billion approved in February--not coincidentally, after Bernankesignaled his support. More recently, the House approved a $61 billion stimulus in late September, but the package went nowhere when a similar measure sank in the Senate in the face of GOP opposition and a potential White House veto.
Building bridges. Pelosi continued to stand her ground, even as members of Congress hurried home to campaign. She has been arguing for money to build roads, bridges, and highways; for preventing cuts at the state level in healthcare, education, and public safety; for extending unemployment checks; and for helping families with rising grocery bills. As has been her custom, she summoned prominent economists to the Capitol, this time on Columbus Day, a federal holiday. Pelosi later ordered key committee chairmen to hold a series of hearings--even though Congress technically has adjourned--on the size and composition of a stimulus. Within a week, Bernanke was on board, advocating 'short term' fiscal measures.
Why part with billions now, either by increasing spending or lowering taxes, as the nation's debt nears $10 trillion and storm warnings say conditions will worsen as baby boomers retire and gobble up entitlements? Leading Democratic economist Joseph Stiglitz, part of Pelosi's team of experts, says that most economists believe the recession could be deeper and longer than had been thought. 'The economy has been weak since the beginning of 2008, and we should think of recovery in 2010, not 2009,' he says, 'and that would be optimistic.'
Stiglitz, a professor at Columbia University and veteran of the Clinton administration, compares a stimulus to medicine, saying some should be curative to help the economy bounce back and some preventive to stop it from worsening. Using the gross domestic product as a benchmark, he says that spending 2 percent--or $300 billion to $350 billion--is the minimum needed over two years.
More broadly, experts say a stimulus works best when it's timely, targeted, and temporary. One rule of thumb: Money given to the poor tends to be spent rapidly, while better-off households are more apt to retrench in uncertain times.
An immediate concern is the fiscal crises in dozens of states, which are closer to the front lines of the ongoing foreclosure mess and slammed by declining income and sales tax revenues. Thirty-six states are facing cumulative budget gaps in fiscal 2010 in the range of $100 billion, according to the Center on Budget and Policy Priorities in Washington. The liberal-leaning center backs giving $50 billion to the states now, up to $35 billion of which would go to Medicaid for the poor.
Boehner and the GOP favor tax cuts to resuscitate the economy. 'If Congress is going to take action, it should be through fast-acting tax policy that boosts incentive to invest and create jobs. That is the growth dynamic that leads to a bigger economic pie,' says Rep. Paul Ryan of Wisconsin, the top Republican on the House Budget Committee. A stimulus would only transfer money from one part of the economy to another, Ryan insists.
At the conservative Heritage Foundation, its top number cruncher, William Beach, says making all or most of President Bush's tax cuts permanent would stimulate investment. He argues that investors need certainty about the outlook and says tax increases, especially if they land on capital, increase the cost of capital and lower investment returns.
How this drama plays out will depend on both President Bush and his successor. There's talk of 11th-hour horse trading. One sweetener that Pelosi could offer skeptical Republicans is approval of the Colombia Free Trade Agreement, a key Bush initiative. Lawmakers could manage to pass a major stimulus bill or merely stopgap legislation that leaves the heavy lifting to the new Congress, which meets January 6. 'This is a unique crisis,' say political scientist James Thurber of American Univer-sity. 'I think Congress will move on a stimulus package in late November, with advice from the next president.'
One thing is certain: Members of Congress, with approval ratings in the teens, even lower than Bush's, are being bombarded by constituents mad as hell about disappearing jobs, a wildly fluctuating stock market, and hemorrhaging 401(k) accounts. That suggests they will do something sooner rather than later. But the big unknown is whether whatever package they assemble will be strong enough medicine.