Economic Stimulus Gains Traction

By Neil Irwin, Lori Montgomery and Dan Eggen

Washington Post Staff Writers - Tuesday, October 21, 2008; A01

An effort to boost the economy with a massive injection of public funds gained momentum yesterday, as Federal Reserve Chairman Ben S. Bernanke tentatively endorsed the idea of a new stimulus package and the Bush administration softened its opposition.

The remarks by the nation's economist in chief were a boon for congressional Democrats, who have argued for weeks that the government should authorize billions of dollars in additional spending. But Bernanke, who generally resists inserting himself into political debates, made clear that any new package must be narrowly focused to quickly provide a shot of relief to the economy.

Even though the government has taken dramatic steps to prop up financial firms in recent weeks, the underlying shape of that economy is looking worse, according to a slew of new data.

The economy is likely to be weak "for several quarters," Bernanke told the House Budget Committee, and there is "some risk of a protracted slowdown." For that reason, he said, "consideration of a fiscal package by the Congress at this juncture seems appropriate."

The stock market soared in response to Bernanke's remarks, as well as to signs of healing in the troubled credit markets. The Dow Jones industrial average was up 413 points, or 4.7 percent.

Congressional Democrats, led by House Speaker Nancy Pelosi (D-Calif.), are looking to craft a stimulus package of up to $300 billion, and could attempt to push it through Congress soon after the Nov. 4 election. The package would likely include a fresh injection of cash for road-building projects that have been postponed but that advocates say could create jobs. Democrats also are pushing to expand unemployment benefits, aid cash-strapped state governments and increase spending on food stamps -- provisions that supporters say would provide a big bang for the buck because the money would flow directly into the economy.

The White House and Republicans in Congress have been cool to the idea of a stimulus plan, dismissing it as pork-barrel spending that would worsen an already bloated budget deficit while bringing little relief to the broader economy. President Bush signed an earlier stimulus bill in February but has opposed a second round of spending.

Unless the White House agrees to negotiations to assemble a package that could win GOP votes and the president's signature, aides said Pelosi is unlikely to move forward until the next administration takes office in January.

The Bush administration's position has softened as the global financial crisis has worsened, however, and officials yesterday signaled a willingness to consider stimulus proposals.

White House Press Secretary Dana Perino, speaking to reporters aboard Air Force One, said the administration's stance would depend on the details of any package. Perino declined to say whether Bush agreed with Bernanke on the need for a second stimulus package, saying he would consult with Treasury Secretary Henry M. Paulson Jr. and other senior aides before reaching a conclusion.

Over the next two weeks before the election, House Democrats plan to hold hearings to lay out the case for more stimulus spending.

So far, they have focused on measures that were dropped from the first stimulus package. There are signs that Republicans would support another temporary extension of unemployment benefits for workers whose benefits have run out and additional spending on food stamps. The battle is likely to come over the proposals for spending on infrastructure and aid to the states.

Many Republicans argue that money for such projects would be spent too slowly to spur short-term economic growth, a concern shared by some liberal economists. Republicans also argue that aid to the states would reward irresponsible spending by some legislatures. In January, the nonpartisan Congressional Budget Office concluded that neither strategy is a very effective way to stimulate the economy.

Thousands of road and other projects have been postponed because of the skyrocketing cost of construction materials and, more recently, the rising cost of borrowing money. Steve Sandherr, head of the Associated General Contractors of America, said his group and others have identified more than 3,000 road and other projects that could put people to work immediately with an injection of nearly $30 billion.

"All the regulatory compliances have taken place," Sandherr said. "They're just sitting on a shelf waiting for the state to put them out to bid."

Similarly, because state governments are required to balance their budgets each year, budget shortfalls in state capitals prompt tax increases or spending cuts, both of which can dampen economic activity. With 36 states under fiscal stress, the federal government could preserve jobs by sending as much as $50 billion to the states, said Iris J. Lav, deputy director of the Center on Budget and Policy Priorities.

Although House Democrats are contemplating another general tax rebate, similar to the one approved in February, the idea has not generated much enthusiasm. "People need jobs more than they need checks," said Jared Bernstein, an economist at the Economic Policy Institute who is advising House Democrats.

Bernanke's tentative endorsement could put further pressure on the White House to come around, as it did last winter. When appointed Fed chairman, Bernanke indicated he did not want to meddle in decisions over taxes and spending, which he views as the prerogatives of elected officials. But several times now he has thrown his support behind legislative efforts to pump federal dollars into the troubled U.S. economy, including the government stimulus package passed in February and the $700 billion financial system rescue that became law earlier this month.

The reason for his turnabout: The normal tools that the Fed uses to stimulate the economy, particularly interest rate cuts, are not having their intended impact given the problems facing banks and other financial institutions. Bernanke has concluded that government spending would help.

But he hardly offered unconditional support. He said that any plan should be structured so that the benefits are felt during the period in which the economy is likely to be weak -- meaning, in the coming months. And he urged a plan that maximizes the ripple effects of spending on overall economic growth. Bernanke did not spell out details, but many independent economists say spending that goes to low-income Americans is likely to spread most rapidly through the economy, as they are less likely to save the money.

Bernanke also suggested that Congress try to find ways to ensure that a stimulus package make it easier for Americans to get credit. For example, he said, Congress could offer to pay fees charged by Fannie Mae and Freddie Mac, effectively reducing mortgage rates. Or it could offer tax credits to encourage lending, or even direct lending by the government.

Congress "should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," Bernanke said. "Such actions might be particularly effective at promoting economic growth and job creation."