Fed, Congress consider 2d stimulus program
The Federal Reserve and Congress are pushing out close to $1 trillion to repair the nation's financial system and to encourage lending. But that is not enough to revive the economy. Spending has to resume.
Consumers, however, have cut back sharply on their spending, in what will be the first quarterly decline in 17 years when the government tally is in for the third quarter. Business, in response, is shrinking its outlays for equipment, supplies, and personnel. And now dozens of state and city governments, their tax revenue falling short of expectations, are engaged in yet another round of cost-cutting.
To offset this shrinkage, and head off a severe recession, the Democratic leadership in Congress is "seriously considering" a large fiscal stimulus proposal, which would send a significant amount of money to states and cities. "We have to prop up consumption," Representative Barney Frank, a Newton Democrat and chairman of the House Financial Services Committee, said in an interview in which he revealed some of the details the party leadership was discussing.
The new proposal would be far greater than the $60 billion stimulus package the House passed in September, Frank said. The Senate has not acted on the bill, which was dwarfed in scope by the sums being pledged to Wall Street companies and commercial banks.
Congress, now in recess, would have to return after the November election to act on the proposal in a lame-duck session.
This new effort would be more diverse than the stimulus that Congress, with bipartisan support, approved this year and President Bush signed. That package, at a cost of $107 billion, mostly went to low- and moderate-income families, in the form of checks in the spring and early summer. Those checks lifted spending for a while, many economists concluded, and helped compensate consumers as gasoline prices surged. But an unknown amount was used to pay down debt or buy imports. Neither lifts output in this country.
Republicans embraced the last stimulus plan, and they might very well embrace another. But their long-held position has been that the best way to give the economy a boost is through tax cuts at the corporate and individual level. They also express concerns that some money funneled to the states would be spent inefficiently, for example on programs that would generate few jobs.
The Democratic proposal would provide tax relief in some form for families, the goal being to step up their spending, as the rebates were intended to do this year. In addition, unemployment insurance benefits would be extended beyond 39 weeks and the food stamp program would expand. Both would channel money to people who would probably spend every penny to meet their needs. But the biggest chunk, perhaps as much as $150 billion, would go to states and cities to sustain their everyday spending.
The rationale for another stimulus package, particularly one that helps the states and cities, is compelling for many economists. The nearly $1 trillion that Congress and the Federal Reserve are making available to the financial system is intended to make credit more available. That props up the supply side.
But to make the economy grow, or stop contracting, demand is required. Consumers, businesses, and governments need confidence to spend their own incomes or tap credit from a repaired financial system. In the case of states and cities whose revenue is shrinking, bigger federal subsidies would ease the need to cut so many jobs and services to balance their budgets.
"That is the whole rationale for giving money to the states and cities," said Alan S. Blinder, a Princeton University economist who served in the Clinton administration and also as vice chairman of the Federal Reserve Board.