The Wall Street Journal-20080126-Stimulus Deal Spurred by Fears Of Voter Backlash- Reid- Bush Faced Off In Tense Conference Call- Bernanke-s Private Talks
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Stimulus Deal Spurred by Fears Of Voter Backlash; Reid, Bush Faced Off In Tense Conference Call; Bernanke's Private Talks
WASHINGTON -- On Jan. 17, Washington's mad dash to finalize an economic-stimulus plan ran into a wall.
On an afternoon conference call, the two top Democrats in Congress warned President Bush against going public with his own plan. "People will have to come out and criticize it if you put out a plan," Harry Reid, the Senate majority leader, said, according to people familiar with the matter. "It will look like you're trying to jam us on this." Mr. Bush said he'd think it over.
Democrats left the call fuming. Some discussed rushing out their own plan to avoid being upstaged. The effort by both sides to keep their partisan instincts under wraps was coming unraveled. Ten minutes later, the president averted a clash by instructing his Treasury secretary, Henry Paulson, to call Capitol Hill leaders and say the White House would keep mum on the details of its plan.
A week later, congressional leaders and the White House announced their boldest attempt yet to address the economic uncertainty that some fear could lead to the deepest U.S. downturn in decades.
The speed with which Washington hashed out the plan was driven mostly by the drumbeat of bad economic news. Behind the scenes, it was greased by other powerful motivations. Congressional Democrats needed to demonstrate they were capable of results after a year of gridlock. Republican lawmakers, up for re-election, wanted to show sensitivity to voters' economic woes. And the White House didn't want "recession" added to its legacy.
One wild card was Federal Reserve Chairman Ben Bernanke. After a series of private meetings with lawmakers throughout January, he endorsed the concept just as it was taking off. The move appears to reflect his concern about the worsening outlook for the economy -- and the limits to how much Fed interest-rate cuts can boost growth.
The deal on a stimulus package marked a rare agreement in the capital, where the two parties have been at loggerheads for most of Mr. Bush's term.
The question now: In their zeal to appease unhappy voters and investors, did lawmakers and policy makers go too far? Or did they jump to action at just the right moment to avoid a deep recession?
"Washington has overreacted and Washington has pushed the notion that a recession is imminent beyond what the economic data would justify at this point," argues Lou Crandall, chief economist at research firm Wrightson ICAP. Mr. Crandall said the Fed's move this past Tuesday to cut rates by three-quarters of a point suggests that it, too, was swept up in the panic. Stimulating the economy too much could produce unwelcome side effects, such as inflation. Others say the moves bring a welcome dose of confidence.
The package's centerpiece is $100 billion in credits and rebates for an estimated 117 million families plus $50 billion in tax incentives to encourage businesses to spend money on new equipment. President Bush on Friday urged Congress to pass the package quickly without adding any provisions, although some senators have said they would like to make changes.
The origins of the stimulus package stretch back to last year. Before Christmas, Mr. Paulson and the White House economic team told Mr. Bush that a fiscal boost might be worth considering. At the time, the economic data were still ambiguous. Since Congress was heading out of town for vacation, Mr. Bush decided to hold off on a decision until the picture grew clearer, according to two senior White House officials.
Throughout December, House Democrats met with consultants, economists and constituents and concluded they needed to show results during their second year in the majority, rather than taking political stands that would fail, such as insisting on a troop withdrawal from Iraq. Republicans, too, wanted to be responsive to voters' concerns.
In January, the economic picture darkened. A key gauge of manufacturing registered its poorest reading in more than four years. New data showed that the unemployment rate grew in December to 5% from 4.7%. The day before the Fed delivered its emergency rate cut, the Dow was at 12,099.30. Just three months earlier, it had hit a record 14,164.53.
The president was about to embark on a long trip to the Middle East. In his absence, he asked Mr. Paulson, who was fast winning the trust of Democrats, to sound out Capitol Hill on a possible rescue package.
Mr. Paulson placed calls to executives to see if they could sense changes in the economy that hadn't appeared in the data. Companies with markets overseas reported they were doing reasonably well. But retailers and banks with big credit-card operations told the secretary that the holiday shopping season had been a dud. "Everybody is telling me that things took a downturn in the middle of December," Mr. Paulson told his aides at a staff meeting in early January.
On Jan. 8, House Speaker Nancy Pelosi called for legislation to stimulate the economy. The next week, she met with Fed Chairman Bernanke in her office off the Capitol rotunda. At the meeting, the Fed chairman told her a stimulus package could help if it were temporary and designed to benefit the economy this year by spurring consumer and business spending.
Two days later, President Bush, aboard Air Force One on his way home from his trip, came to a similar conclusion and ordered his staff to ready a plan.
On the 17th, Mr. Bernanke repeated his message to Congress. His endorsement threw oil on the fire. It largely mirrored Democratic proposals that were starting to form. And it knocked down demands by administration officials and congressional Republicans that any stimulus package should extend the President's signature tax cuts, which are set to expire at the end of the decade.
Recognizing that Mr. Bernanke could swing the debate, Rep. Xavier Becerra, a California Democrat, told the Fed chairman, tongue in cheek: "I'm going to give you one last chance to retract your statements that you made today."
That afternoon came the testy conference call and the hasty make-up calls that followed. Mr. Reid, the Senate majority leader, home in Nevada ahead of that state's presidential primary, still wasn't mollified. He didn't want the president to give any kind of speech the next day. Ms. Pelosi was more measured. In a written statement, she said it was "significant progress" for the president to acknowledge the need for a stimulus.
The following day, Mr. Bush said he wanted Congress to pass a package worth about 1% of gross domestic product, or roughly $145 billion. He spoke of tax relief for individuals, and tax breaks to encourage companies to invest. But he kept the proposal sufficiently vague to assuage Democratic concerns.
"That's when we really got the feeling from the White House side that things would really be different," said Sen. Charles Schumer, a New York Democrat. "It bought a lot of good will."
Mr. Paulson spent much of the Martin Luther King weekend negotiating over the phone with the Capitol Hill leaders. On Tuesday morning, Jan. 22 -- the day of the Fed's big rate cut -- Mr. Bush met senior lawmakers to brief them on his Mideast trip. They wanted to talk about stimulus, too.
On Wednesday, the pace intensified. At 7 a.m., congressional leaders and Mr. Paulson met for breakfast -- Ms. Pelosi's office supplied the bagels, donuts and fruit -- at the Capitol. Democrats laid out what they wanted in the package: a boost for unemployment benefits, food stamps and Medicaid funds for states, as well as a youth summer-jobs program and low-income heating assistance. They said people who don't pay income tax should get money, but those with the highest incomes shouldn't. All these ideas ran against Republican wishes.
At 2 p.m., the group reconvened. In a breakthrough, John Boehner, an Ohio Republican who is the House minority leader, offered a surprising compromise. He said he'd give Democrats most of what they wanted on the rebate -- including $28 billion for people who didn't pay income taxes -- but wouldn't accept the new spending programs, though food stamps and unemployment insurance were priorities of labor unions and many Democratic lawmakers.
Three hours later Ms. Pelosi secured the approval of the rest of the Democratic leadership. At 7 p.m., over cold cuts and vegetables, the deal's broad parameters were inked. That evening and through the next day, she sold the concept to other, sometimes uneasy Democrats.
"Life is a series of trade-offs," said Rep. Rahm Emanuel, an Illinois Democrat and member of the House leadership. "I like food stamps as much as everyone else." But a single mother with a $30,000 income and two children would get hundreds of dollars more under the rebate plan than she would have from the food-stamp proposal. "Between those choices, it's not even close," Mr. Emanuel said.
The Senate is scheduled to start debating the package next week. Mr. Paulson plans to spend this weekend talking to senators to make sure the House compromise holds together.
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Justin Lahart contributed to this article.
