The Wall Street Journal-20080118-Default Fears Unnerve Markets- Bush- Democrats Rush to Roll Out Stimulus Plan
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Default Fears Unnerve Markets; Bush, Democrats Rush to Roll Out Stimulus Plan
WASHINGTON -- President Bush and Congress, driven by the worsening economic outlook, a tumbling stock market and Americans' growing sense of financial insecurity, are speeding toward agreement on a package of measures to stimulate the economy.
The president is expected to lay out the principles of his stimulus plan today, but without getting into specifics. Privately, the White House has discussed its support for a tax rebate of as much as $800 for individual taxpayers, more than double the $300 rebate featured in a 2001 effort to spur economic growth.
The administration also signaled it would accept a stimulus bill that didn't include an extension of Mr. Bush's tax cuts -- a centerpiece of his economic agenda -- removing a potential hurdle to bipartisan support for the legislation.
Congressional leaders, including House Speaker Nancy Pelosi, a California Democrat, have discussed wrapping up details of their stimulus plan the week of the State of the Union address, which falls on Jan. 28, though procedural hurdles in the Senate could delay final action for weeks.
Additional items on the Democrats' wish list: lengthening unemployment benefits and expanding food stamps and the Earned Income Tax Credit, which helps low-income taxpayers.
Fears of a recession continued driving down stocks yesterday. The Dow Jones Industrial Average plunged 306.95 points, or 2.5%, to close at 12159.21. All 30 Dow components again ended lower, and prices for 10-year and 30-year Treasury bonds soared as investors sought safe havens.
The selloff was triggered in part by the latest mammoth loss on Wall Street, this time from Merrill Lynch & Co. Merrill announced a fourth- quarter net loss of $9.8 billion as it recorded $16.7 billion in losses related to subprime mortgages and other fallout from the credit-market turmoil. Federal Reserve Chairman Ben Bernanke's warning about a slowing economy contributed as well, as did reports of a sharp decline in manufacturing activity and downgrades of key bond insurers.
The political momentum behind a stimulus package has been fueled in part by worried lawmakers, who got an earful about the economy from their constituents over the holiday break. That's helped to create an unusually bipartisan climate in Washington, which was plagued by inaction and political bickering for most of last year.
Neither Democrats nor Republicans want to be seen standing in the way of compromise on economy-boosting measures for fear of incurring the wrath of voters worried by falling home prices, rising unemployment and high prices for gasoline, heating oil and health care.
"Whether or not it's technically a recession, it certainly feels like one," said Republican Rep. Phil English, at a recent hearing on the economy. His Erie, Pa., district is among several dozen metropolitan areas that already appear to be in recession, according to an analysis by Mark Zandi, chief economist at Moody's Economy.com.
The magnitude of voters' frustration with the deteriorating economy and congressional inaction is forcing both parties to set aside the instinct for political infighting that's common in election years. "The future is bleak," said Rep. William Lacy Clay, a Missouri Democrat, who added that people have approached him at the grocery store and during tours of local businesses to plead for action. "My hope for us is that we quickly respond."
Mr. Bernanke added to the momentum yesterday by agreeing with the notion that the economy could use a jolt of fiscal adrenalin. In testimony before the House Budget Committee, he said fiscal stimulus "could be helpful in principle" and could reinforce the impact of interest-rate cutting by the Fed. But he cautioned that "design and implementation" are "critically important." He said he isn't -- at least for now -- forecasting a recession, but he does see the economy "growing at a relatively slow pace" this year.
Asked about the optimal size of a stimulus package, Mr. Bernanke said, "If you did $100 billion of stimulus . . . effects on the growth rate . . . would be significant. It would not be window dressing." Noting that stimulus packages ranging from $50 billion to $150 billion have been mentioned, the Fed chief termed those "reasonable . . . from a macroeconomic viewpoint."
There remains a chance that a stimulus package could get bogged down by political bickering. Congressional aides say some Democrats came away from a conference call yesterday between the White House, Treasury Secretary Henry Paulson and top lawmakers annoyed that Mr. Bush was planning to unveil details of his proposals before meeting congressional leaders to hammer out a compromise. They also urged Mr. Bush to stay actively involved with the negotiations after he suggested it would be up to Capitol Hill to reach a deal, said one person familiar with the call.
After the call, Mr. Bush contacted House Minority Leader John Boehner, according to a Republican aide. They talked over the matter, and Mr. Bush decided to limit his remarks today to the general outlines of his plan.
According to White House spokeswoman Dana Perino, Mr. Bush listened to lawmakers' ideas and shared his thoughts with them. "He told them that he will call for an effective, temporary growth measure, and he will lay out principles tomorrow for what an effective approach would be, and what would not be effective," Ms. Perino said. She said it was too early to say what would be in the president's package, which is being devised by Mr. Paulson.
One crucial decision in designing the package will be who gets the rebate checks. The current White House plan doesn't propose making the credit available to those who don't currently earn enough to pay taxes. Democrats are criticizing that element, and want an income limit to ensure wealthier people aren't eligible for the rebate.
The administration's decision not to push for the stimulus plan to include a provision making Mr. Bush's tax cuts permanent alleviates a potential source of conflict. Democrats had indicated that Republican insistence on including an extension of the tax cuts, which are set to begin expiring in 2010, would have made a deal impossible.
"The president will continue to push for making his tax cuts permanent," said White House spokesman Tony Fratto. "However, today's call and tomorrow's remarks will be on an immediate and effective growth package. The president supports a permanent extension of his tax cuts, and he supports a short-term growth package, but they are separate."
Congressional Democrats, meanwhile, are suggesting they would be willing to suspend their budget rules and agree to tax breaks without first finding ways to pay for them. They also indicated willingness to add some incentives for business, usually a key Republican demand in economic-stimulus efforts.
Beyond taxes, congressional leaders have discussed a package that could include an extension of jobless benefits -- which would help to cushion families from the economic slowdown -- and some sort of expanded federal assistance to states. One idea would be to provide more funds for Medicaid, the health program for the poor, though that initiative might be difficult for the administration to support. Other items on the short list included a temporary expansion of the $1,000 child credit and, possibly, some narrow public-works funding.
House Speaker Pelosi said there is "general agreement" about what a stimulus package should include. "I would hope before the month is out, one month from now, that we would be watching the effects of the legislation that we have passed," she said.
The stimulus package could end up resembling the 2001 stimulus plan, which was widely regarded as well-timed and effective in keeping that year's recession mild. In that package, which Mr. Bush supported, married couples got as much as $600 in tax rebates and single tax filers as much as $300. The rebates were based on the new 10% bottom tax bracket that the 2001 legislation created. The lowest bracket previously had been 15%.
This time around, the rebate could eventually be as much as $800 for individuals, $1,600 for married couples, according to some officials. The rebates would be created, in effect, by temporarily eliminating the 10% tax bracket. Because the government is in the midst of the tax-filing season for 2007, it could take several months -- perhaps until June -- for rebate checks to make it into the hands of taxpayers.
In his testimony, Mr. Bernanke acknowledged the benefit of the 2001 tax rebates. He also said longer-term tax cuts could be useful down the road if offset by spending reductions, though he repeatedly sought to separate those ideas from any discussion of a short-term stimulus package.
The greatest economic effect of the stimulus would come from people with lower incomes, Mr. Bernanke said. "If you're somebody who has lots of financial assets and you receive an extra dollar, you may not change your spending much because you can simply either put the dollar in your bank account or take out a dollar as you need it," Mr. Bernanke said. "If you're somebody who lives paycheck to paycheck, you're more likely to spend that extra dollar."
Mr. Bernanke's endorsement of fiscal stimulus reflects Fed officials' growing sense of urgency about threats to economic growth. The Fed is likely to cut interest rates half a percentage point this month; there is speculation it may cut by three-quarters of a point.
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Greg Hitt contributed to this article.
(See related article: "Emerging Risks In Bond Insurance Add to Turmoil" -- WSJ January 18, 2008)
