In testimony Thursday before the House Budget Committee, Federal Reserve Chairman Ben Bernanke was expected to support enactment of a temporary economic stimulus plan.
Bipartisan consensus is emerging over the need for a fiscal stimulus to prevent the economy from slipping into recession. However, little agreement has yet emerged on the exact terms.
Bernanke will join other key policymakers, including the Democratic congressional leadership, President Bush and some congressional Republicans, in concluding that an immediate economic stimulus plan is desirable. Discussions over details will accelerate next week when the Senate returns from its holiday recess and Bush returns from his Middle East trip.
Bernanke’s support for a stimulus package — to include spending increases, or tax cuts, or some combination thereof — is conditioned on:
- quick implementation (to give an immediate boost to the economy);
- temporary status (reducing the long-term impact on the federal budget deficit); and
- a balanced approach that encourages business and consumer spending.
Bernanke’s testimony follows his observation last week that further interest rate cuts might be necessary to jump-start the economy — strongly suggesting that the Fed’s concern about the risk of recession has increased.
Emerging bipartisan consensus
Policymakers are working on the terms and timing of the proposed stimulus package:
Bernanke’s endorsement of the need for stimulus will provide a powerful prod for many lawmakers to support a package, especially as thus far, this Fed chairman has not inserted himself into the partisan wrangling over fiscal policy as aggressively as his predecessor, Alan Greenspan.
Rep. Barney Frank (D-Mass.), chairman of the influential House Financial Services Committee, has suggested agreement on a stimulus plan is possible, provided that Republicans are willing to abandon their commitment to making the Bush tax cuts permanent.
House Speaker Nancy Pelosi (D-Calif.) has completed initial discussions with her Republican counterparts and has promised a proposal before the end of the month. Congressional leaders will meet with Bush on Jan. 22.
Some Democrats expect to propose a concrete stimulus package before the Jan. 29 State of the Union address, in which Bush is likely to lay out the administration’s plan.
The package is likely to cost at least $100 billion and incorporate a combination of tax cuts and targeted spending measures.
Economic stimulus proposals have emerged as a major issue in the presidential primaries, especially among the leading Democratic candidates:
Democrats. Sen. Hillary Rodham Clinton (N.Y.), former Sen. John Edwards (N.C.) and Sen. Barack ObamaBarack ObamaOvernight Tech: FCC chief gives states more control over internet subsidies | Dems urge Trump to veto bill blocking online privacy rules | House boosts its mobile security Overnight Defense: Pentagon considers more troops for Afghanistan | McCain, Graham won't back short-term funding | GOP defends Trump rules of engagement Paul Ryan sells out conservatives with healthcare surrender MORE (Ill.) agree on the need for fiscal stimulus, but differ on details:
- Edwards plan. Edwards in December was the first of the leading candidates to propose a stimulus package, to provide $25 billion initially (with an additional 75 billion dollars to follow if economic conditions warrant), in assistance to state governments, creation of a housing fund, funding for clean energy projects and extension of unemployment insurance. Edwards has also put forward an extensive housing reform package, to include controls on “predatory” mortgages, mandatory halts on foreclosures until workout terms are offered, allowing retention of homes in bankruptcy proceedings and creating a new federal regulator for financial services products.
- Clinton proposal. Clinton has proposed a $70 billion plan, which includes a housing crisis fund to assist states and cities in cushioning the effects of foreclosures, emergency energy assistance for low-income families, the extension of unemployment benefits and funds to promote alternative energy and energy efficiency. Further, she has called for a 90-day moratorium on sub-prime mortgage foreclosures and a minimum five-year freeze on interest rates on sub-prime loans.
- Obama plan. Obama has offered a $75 billion stimulus plan (with the possibility of a further $45 billion). It includes an immediate $250 tax cut for all workers; a temporary $250 increase in Social Security benefits (with the possibility of an additional $250 if economic conditions deteriorate); relief to homeowners; aid to states to maintain services; and extension of unemployment benefits.
These initiatives are more rhetorical than practical, as the key movers on any 2008 plan will be the current Democratic congressional leadership and the Republican administration. The leading Democratic candidates have tellingly been silent on details for financing their proposals.
Republicans. The leading Republican candidates have largely resisted offering short-term stimulus proposals in favor of support for permanent tax policy changes. However, this will almost certainly change if economic conditions worsen.
Former Massachusetts Gov. Mitt Romney credited a focus on economic issues for his victory in the Jan. 15 Republican presidential primary in Michigan, so the Republican candidates will weigh in shortly.
Republican fiscal debate
Current economic conditions are causing administration figures and congressional Republicans to reconsider their long-term approach to fiscal policy. Some have suggested that any stimulus plans will face fierce opposition from members of Congress committed to preserving Bush’s tax-cutting legacy:
- Abandoning Bush’s legacy? While some Republicans are reluctant to abandon their tax-cutting rhetoric in an election year, the electorate may hold the party responsible for current economic conditions and the consequences of the sub-prime crisis. A stimulus package might offset these concerns by temporarily boosting overall economic performance — or at least provide rhetorical cover to Republican candidates in the November elections.
- Corporate incentives. However, the support of many fiscally conservative Republicans for a stimulus plan would hinge on extensive corporate tax cuts, incentives and concessions. Many leading lawmakers also favor individual tax rebates.
Democratic political calculus
On the Democratic side, there is widespread agreement on the need for stimulus, but disagreement over precise terms:
- Individual rebates favored. Most Democrats agree on the need for some tax relief, targeting middle- and low-income voters. Business tax breaks have been mooted — including incentives for small businesses — but support for them is limited.
- Pay-go’ rules abandoned? The party’s commitment to pay-as-you-go budget rules — which require that any tax cuts or spending increases be offset to avoid boosting the budget deficit — pose a serious potential obstacle to any stimulus plan.
This priority is likely to be abandoned, temporarily, to make a package possible.
The economic problems that confront voters differ between geographic regions, and the final shape of an economic stimulus plan will likely reflect this reality. Some Democrats favor measures including assistance to mitigate high heating oil costs; extending unemployment benefits (with the possibility of longer extensions in states with high unemployment); increasing food stamp assistance; and offering direct assistance to prevent mortgage foreclosures.
Strong support exists for increasing spending on infrastructure, but this has triggered opposition on the grounds that more direct measures are necessary that immediately boost consumer and business spending.
Obstacles to agreement
There are two main barriers to a bipartisan agreement:
- Republicans may need to abandon efforts to make Bush’s tax cuts permanent, and scale back their preference for business tax incentives (the latter possibly as part of an overall long-term commitment to improving the competitiveness of the corporate taxation system along the lines being explored by Treasury Secretary Henry Paulson).
- Democrats are likely to agree a one-time exception to pay-as-you-go budget rules. The leadership will also need to impose some control over spending priorities to ensure that they produce real, targeted economic effects.
Oxford Analytica is an international consulting firm providing strategic analysis on world events for business and government leaders. See www.oxan.com.