23 October 2008
Congressional Democrats Push for Economic Stimulus
White House warms up to the idea; central bank calls for targeted bill
Washington — U.S. congressional leaders are discussing an economic stimulus plan to revive a slowing economy as credit markets gradually thaw.
Congressional Democrats have been pushing for an economic recovery package in response to gloomy economic news.
On October 19, Edward Lazear, the chairman of President Bush’s Council of Economic Advisers, said some U.S. regions have already entered a recession.
His view is supported by recent economic data. According to the Blue Chip forecast, gross domestic product declined in the third quarter and is likely to decline further in the fourth quarter. Many corporations have reported weak earnings, and job losses have accelerated in recent months. In September, the U.S. economy shed 159,000 jobs, and the unemployment rate rose 0.4 percentage points to 6.1 percent between July and September, according to the Labor Department.
Ben Bernanke, the chairman of the Federal Reserve, the U.S. central bank, said October 21 that the economic weakness is likely to last several quarters, with “some risk of a protracted slowdown.”
Democratic Speaker of the House of Representatives Nancy Pelosi, who leads the effort to pass a law intended to revive the economy, called on congressional Republicans to work with Democrats on “economic recovery legislation that will promote the creation of good jobs and help restore investor and consumer confidence necessary for the health of our economy.” She said the need for action has become urgent in recent weeks and asked the chairmen of relevant committees to schedule hearings on the issue.
The White House and congressional Republicans have resisted another attempt at reviving the economy out of concern about the growing budget deficit and uncertainty about whether a stimulus package would work. In April, Congress enacted a $150 billion stimulus package, which was mostly in the form of a tax rebate. Its effect on the economy was relatively small and short-lived, economists say.
The Bush administration has softened its opposition to a new stimulus as more data on the weakening economy has become available and an economic slowdown has spread around the world. On October 20, White House Press Secretary Dana Perino told reporters the administration’s position depends on the details of a congressional plan.
After the November presidential election, Democrats plan to push through Congress a package that is likely to include an investment in road-building projects, the expansion of unemployment benefits, an increase in spending on food benefits and financial aid to struggling state governments, according to news sources.
Bernanke tentatively endorsed the idea of injecting more money into the economy. However, in testimony before the House Budget Committee, he said the package should be designed to produce the greatest effects in the short term and to improve access to credit.
Several private-sector economists expressed support for another stimulus as long as it is “timely, temporary and targeted,” as Morris Goldstein of the Peterson Institute for International Economics put it. But they differ on the details. For example, Martin Baily of the Brookings Institution backs, among other things, another round of tax rebates, help for homeowners facing default and infrastructure investment.
But other private-sector and government analysts question whether infrastructure investment would achieve the desired goals. Transportation Department economist Jack Wells told CQ Weekly magazine that even half-advanced road projects would take too long to spur economic activity in the short run.
In contrast to the general economy, credit markets — until now the main worry of policymakers — have shown signs of improvement. Although it will take weeks or months for the $750 billion financial rescue plan to significantly boost financial markets, lenders have already gained enough confidence to start lending to each other again, according to observers. Treasury Secretary Henry Paulson said October 20 that his department has received “indications of interest from a broad group of banks of all sizes” that they are considering selling preferred stock to the government.
The cost at which banks lend to one another for three-month and overnight loans fell October 22 for the third consecutive day. The cost of commercial paper — short-term debt used by many businesses — also dropped a day after the Federal Reserve launched a program to improve the market for short-term borrowing. The central bank’s move was made in response to investors abandoning the commercial paper sector for Treasury bills and other short-term investments they deemed safer.
