Monday 24 November 2008
by: Lori Montgomery, The Washington Post
Barack Obama and Congressional Democrats are proposing a $700 billion stimulus package over the next two years. (Photo: Getty Images)
Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years.
That amount, more than the nation has spent over the past six years in Iraq, would rival the sum Congress committed last month to rescuing the country's financial system. It would also be one of the biggest public spending programs aimed at jolting the economy since President Franklin Delano Roosevelt's New Deal.
Hints of a massive new spending program began emerging last week. New Jersey Gov. Jon Corzine (D), an Obama adviser, and Harvard economist Lawrence Summers, who Obama has chosen to lead his White House economic team, both raised the possibility of about $700 billion in new spending. Yesterday, Obama adviser and former Clinton administration Labor secretary Robert Reich and Sen. Charles Schumer (D-N.Y.) also called for spending in the range of $500 billion to $700 billion.
Transition officials would not confirm that they are considering spending of that magnitude, but they made clear that economic conditions are dire, and suggested Obama might be forced to delay his pledge to repeal President Bush's tax cuts for the wealthy.
Last week, Goldman Sachs said it expects the economy to shrink even faster by the end of the year, at a 5 percent annualized rate. Meanwhile, the Dow Jones industrial average dropped 5 percent for the week, and the nation's largest bank, Citigroup, sought government assistance to avoid collapse.
While Obama has set a goal of creating or preserving 2.5 million jobs by 2011, his economic team - whose members are scheduled to be formally introduced today at a news conference in Chicago - have yet to decide exactly how that would be accomplished or how much it would cost.
Still, Austan Goolsbee, a spokesman for Obama on economic issues who is in line to serve on the White House Council of Economic Advisers, yesterday acknowledged that Obama's jobs plan will cost substantially more than the $175 billion stimulus program he proposed during the campaign.
"This is as big of an economic crisis as we've faced in 75 years. And we've got to do something that's up to the task of confronting that," Goolsbee said on CBS's "Face the Nation." "I don't know what the exact number is, but it's going to be a big number."
Republicans quickly criticized the idea of such a vast new initiative, saying Congress should instead cut taxes to spur economic growth.
"Democrats can't seem to stop trying to outbid each other - with the taxpayers' money," House Minority Leader John Boehner (R-Ohio) said in a statement. "We're in tough economic times. Folks are hurting. But the American people know that more Washington spending isn't the answer."
With financial markets fluctuating wildly and unemployment rising, Democrats want to push a stimulus package through Congress in January and have it ready for Obama's signature when he takes office Jan. 20. Over the weekend, the president-elect announced that he had instructed his advisers to assemble a massive jobs program that also would make a "down payment" on much of his domestic agenda.
The plan would include new funding for public works projects to repair the nation's crumbling infrastructure, as well as a fresh infusion of cash to promote green technology and alternative sources of energy. It also would include targeted tax cuts for working families, students, the elderly and job-creating businesses that Obama touted on the campaign trail.
It may not, however, include one of Obama's central promises: to repeal Bush's tax cuts for families earning more than $250,000 a year. Speaking on ABC's "This Week," Obama's chief political strategist, David Axelrod, said the president-elect is now weighing whether to let the cuts for the wealthy expire on Dec. 31, 2010, as provided in current law. Such a delay would permit Obama to avoid raising taxes during a recession.
"He's committed to getting middle-class tax relief in the pipeline quickly, and there's no doubt that we're going to have to make some hard decisions in order to pay for the things we need, whether it is through repeal of those tax cuts for the very wealthiest or whether we simply allow it to - allow those cuts to expire in 2010," Axelrod said.
The projected cost of an economic stimulus package has been rising steadily as economic conditions have worsened. Economists who were calling a few months ago for $150 billion in government spending to offset flagging demand elsewhere in the economy are now calling for $500 billion or more. Adding tax cuts to the package is expected to increase its cost to the Treasury by as much as $200 billion, Democrats said.
Even some conservative economists have endorsed the larger numbers.
Harvard economist Martin Feldstein, the former director of the National Bureau of Economic Research and an adviser to Sen. John McCain's (R-Ariz.) presidential campaign, said he thinks the government should spend "a minimum of $300 billion a year for at least the next two years."
"The cumulative multi-year deficit would have to be about $700 billion or even more," Feldstein said yesterday via e-mail.
Reich, speaking on CNN's "Late Edition," said the middle class is being squeezed by mountains of personal debt, plummeting home values and a vast tightening in available credit. As a result, he said, "there's not enough buying power in the economy," forcing the government to step in as "the spender of last resort."
In an interview, Schumer said the nation is on the brink of the same kind of deflationary spiral that pushed down prices, closed businesses and obliterated jobs during the Great Depression.
"The economy is in worse shape than people think," Schumer said. "The safest thing is to do anything you can to avoid deflation."
Even House Speaker Nancy Pelosi (D-Calif.), whose aides have in recent weeks balks at suggestions that Democrats might spend as much as $300 billion, conceded yesterday on "Face the Nation" that the price of a stimulus package is likely to be "in the several hundred billion dollar category."
There are downsides to such a dramatic increase in government spending, especially at a time when the annual federal budget deficit already is spiraling toward $1 trillion - about 7 percent of the gross domestic product - a level not seen since the end of World War II. Increasing the deficit means increasing the national debt, which eventually will have to be repaid, with interest, to largely foreign creditors. It also means the nation will be even less prepared to cover the skyrocketing costs of Medicare and Social Security as the baby boomer generation retires.
Washington also could overshoot its target, sparking rampant inflation when the economy recovers. Or the money could be poorly directed and fail to efficiently stimulate economic activity.
"The 1930s recession became the Great Depression because policymakers didn't take the necessary actions. Nobody wants to make that mistake this time around," said Jared Bernstein, an economist at the Economic Policy Institute who has been advising Democrats. "Is there a possibility that we could overshoot? Of course. But from what I've seen, the danger is not doing enough."