Bush and Bernanke back package to stimulate weakening economy
The Fed chief, in testimony to the House Budget Committee, said efforts that involve “putting money into the hands of households and firms that would spend it in the near term” would be more effective than other provisions, such as making Bush’s tax cut permanent. “Again, I’m not taking a view one way or the other on the desirability of those long-term tax cuts being made permanent,” he said.
While shying away from endorsing a specific plan, Bernanke made clear his support for the general concept of an economic rescue package and that it be temporary so that it won’t complicate longer-term fiscal challenges. It is likely that any such package would include tax rebates.
“Fiscal action could be helpful in principle” and may provide “broader support for the economy” than the Fed can furnish alone through reductions in interest rates, Bernanke said. However, “the design and implementation of the fiscal program are critically important,” he said.
Bernanke forecast slower growth in 2008 but not a recession.
When asked by lawmakers about the potential effect of a fiscal stimulus package totaling around $100 billion, Bernanke said that the economic impact could be “significant” and not “window dressing.” Some have floated packages that would range in size from $50 billion to billion to $150 billion – all of which are in the range of “reasonable,” Bernanke said.
Rebates can be useful, he added.
“Getting money to low and moderate income people is good in the sense of getting a bang for the buck” because they tend to spend it quickly, Bernanke said. Research shows that the affluent spend some of their rebates, he said.
Temporary expensing and depreciation provisions for businesses also could spur spending, which would help the economy, he said. As it puts together a package, Bernanke added, “Congress might want to consider a diversified mix of elements.”
But he warned: “I hope Congress can resist having a huge list of things” that would lard up legislation and may not do much to help bolser the economy in the short run.
At the White House, spokesman Tony Fratto said, “The president does believe that over the short term, that to deal with this softening in the economy, that some boost is necessary.” That marked the first White House confirmation that Bush, confronting a deepening economic crises that has shaken much of the nation, supports government intervention. Until now, the White House said the president was just considering some type of short-term boost.
“We do want to try to pass something quickly,” Fratto said later in the day. “I see no obstacle to that. It seems to me that both sides of the aisle in both houses of Congress want to try to get to an agreement,” he said.
Fratto would not divulge the details or what the stimulus would look like, other than to say all options are being considered.
The shaping of a stimulus package was expected to accelerate Thursday during a conference call between Bush and congressional leaders. “I would characterize it as a consultation,” Fratto said.
House Speaker Nancy Pelosi, D-Calif., who was expected to be on the conference call, said Thursday: “We have to spend the money, invest the resources, give the tax relief in a way that again injects demand into the economy, puts it in the hands of those who need it most and into the middle class ... so that we can create jobs.”
On Wednesday, Pelosi and Republican leader John Boehner of Ohio promised to craft legislation to energize the weakening economy.
The fragile state of the economy has gripped Wall Street and Main Street and is a rising concern among voters. The situation has galvanized politicians – including those vying to be the next president – and poses the biggest test to Bernanke, who took over the Fed nearly two years ago.
The White House spoke up after watching a number of indicators of a battered economy. Consumer confidence has plummeted, economic woes have become the top concern of the American public, and the 2008 presidential contenders have scrambled to get in front of the issue.
Fratto declined to say when the president could announce a package, or whether it would be before or after the State of the Union address later this month.
House Budget Committee Chairman John Spratt, D-S.C., said: “It has become increasingly clear that our economy is slowing down, entering a slump if not a recession.”
Dan Lungren, D-Calif., likened a stimulus package to a “vitamin B-12 shot.”
In his testimony, Bernanke again pledged to aggressively slash a key interest rate as needed to bolster an economy that is weakening under the strains of a severe housing slump and credit crisis.
Many economists believe the Fed will lower its key rate, now at 4.25 percent, by a bold half-percentage point at its next meeting on Jan. 30. The Fed cut rates three times last year, starting in September. But some critics on Wall Street and elsewhere have been critical of Bernanke for not taking action sooner and more forcefully.
“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” Bernanke told the budget panel Thursday, echoing the same – and unusually frank – language he used last week to signal the Fed’s next move.
Although Republicans and Democrats differ over what provisions should be part of any economic stimulus package, there’s widespread agreement that tax rebates along the lines of the $300-$600 checks provided in 2001 are likely to be part of the measure. The country last suffered a recession in 2001. This time around, the rebates could be larger. It’s also likely that unemployment benefits will be extended as part of the package.
“To be useful, a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next 12 months or so,” Bernanke told lawmakers. The notion behind the rebates, for instance, is to get money into the hands of consumers quickly so that they boost spending, helping energize the national economy.
“Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving,” Bernanke said. “Thus, fiscal measures that involve long lead times or result in additional economic activity only over a protracted period, whatever their intrinsic merits might be, will not provide stimulus when it is most needed,” he added.
Moreover, Bernanke said any fiscal package should also be “efficient in the sense of maximizing the amount of near-term stimulus per dollar of increased federal expenditure or lost revenue,” he said.
Any such package also must be temporary to avoid making a big boost to the federal government’s budget deficits and adding to the country’s long-term fiscal burdens.
“The nation faces daunting long-run budget challenges associated with an aging population, rising health care costs and other factors. A fiscal program that increased the structural budget deficit would only make confronting those challenges more difficult,” Bernanke warned.
Before Bernanke spoke, there was yet more downbeat economic and financial news. The Commerce Department said new-home building plunged last year by 24.8 percent, the biggest drop in 27 years.