An effort to boost the economy with a massive injection of public funds gained momentum Monday, as Federal Reserve Chairman Ben Bernanke tentatively endorsed the idea of a new stimulus package and the Bush administration softened its opposition.
The remarks by the nation's economist in chief were a boon for congressional Democrats, who have argued for weeks that the government should authorize billions of dollars in additional spending. But Bernanke made clear that any new package must be narrowly focused to quickly provide a shot of relief to the economy.
Even though the government has taken unusual steps to prop up financial firms in recent weeks, the underlying shape of that economy is looking worse, according to a slew of new data.
The economy is likely to be weak "for several quarters," Bernanke told the House Budget Committee, and there is "some risk of a protracted slowdown." For that reason, he said, "consideration of a fiscal package by the Congress at this juncture seems appropriate."
The stock market soared in response to Bernanke's remarks, as well as to signs of healing in the troubled credit markets. The Dow Jones Industrial Average was up 413 points, or 4.7 percent.
Congressional Democrats, led by House Speaker Nancy Pelosi, D-Calif., are looking to craft a stimulus package of up to $300-billion, and could attempt to push it through Congress soon after the Nov. 4 election.
The package would likely include an injection of cash for road-building projects that have been postponed but that advocates say could create jobs. Democrats also want to expand unemployment benefits, help cash-strapped state governments and hike spending on food stamps - provisions that supporters say would provide a big bang for the buck because the money would flow directly into the economy.
Although House Democrats are contemplating another general tax rebate, similar to the one approved in February, the idea has not generated much enthusiasm. "People need jobs more than they need checks," said Jared Bernstein, an economist at the Economic Policy Institute who is advising House Democrats.
The White House and Republicans in Congress have been cool to the idea of a stimulus plan, dismissing it as pork-barrel spending, but administration officials signaled a willingness to consider proposals on Monday.
White House press secretary Dana Perino said the stance would depend on the details of any plan. She declined to say whether Bush agreed with Bernanke on the need for a second stimulus, saying he would consult with Treasury Secretary Henry Paulson and other senior aides before deciding.
Over the next two weeks before the election, House Democrats plan to hold hearings to lay out the case for more stimulus spending.
So far, they have focused on measures that were dropped from the first stimulus package. There are signs that Republicans would support another temporary extension of unemployment benefits for workers whose benefits have run out and additional spending on food stamps. The battle is likely to come over the proposals for spending on infrastructure and aid to the states.
Many Republicans argue that money for such projects would be spent too slowly to spur short-term growth, a concern shared by some liberal economists. Republicans also argue that aid to the states would reward irresponsible spending by some legislatures.
In January, the nonpartisan Congressional Budget Office concluded that neither strategy is a very effective way to stimulate the economy.
'Sitting on a shelf'
Thousands of road and other projects have been postponed because of the skyrocketing cost of construction materials and, more recently, the rising cost of borrowing money. Steve Sandherr, head of the Associated General Contractors of America, said his group and others have identified more than 3,000 road and other projects that could put people to work immediately with an injection of nearly $30-billion.
"All the regulatory compliances have taken place," Sandherr said. "They're just sitting on a shelf waiting for the state to put them out to bid."
Similarly, because state governments are required to balance their budgets each year, budget shortfalls in state capitals prompt tax increases or spending cuts, both of which can dampen economic activity. With 36 states under fiscal stress, the federal government could preserve jobs by sending as much as $50-billion to the states, said Iris Lav, deputy director of the Center on Budget and Policy Priorities.
Bernanke's tentative endorsement could put further pressure on the White House to come around, as it did last winter. Bernanke generally resists inserting himself into political debates, but he has thrown his support behind legislative efforts to pump federal dollars into the troubled U.S. economy, including the government stimulus passed in February and the $700-billion bailout of the financial system that became law this month.
The reason for his turnabout: The normal tools that the Fed uses to stimulate the economy, particularly interest rate cuts, are not having their intended impact given the problems facing banks and other financial institutions. Bernanke has concluded that government spending would help.
Bernanke also suggested that Congress try to find ways to ensure that a stimulus package make it easier for Americans to get credit. For example, he said, Congress could offer to pay fees charged by Fannie Mae and Freddie Mac, effectively reducing mortgage rates. Or it could offer tax credits to encourage lending, or even direct lending by the government.
As the Treasury embarks on its unprecedented recapitalization of banks, it is becoming clear that the government wants not only to stabilize the industry, but also to reshape it. In a step that could accelerate a bank shakeout, the Treasury hopes to spur a new round of mergers by steering some of its $250-billion bailout to banks that are willing to buy weaker rivals, according to government officials. Two senior officials said the selection criteria would include banks that need more capital to finance acquisitions. "Treasury doesn't want to prop up weak banks," an official who spoke on condition of anonymity told the New York Times. "One purpose of this plan is to drive consolidation." Treasury Secretary Henry Paulson said government purchases of stock in banks represent an investment that should eventually make money for taxpayers.
The global financial crisis will raise world unemployment to 210-million people by the end of next year, its highest rate in the past decade, the U.N. labor agency said Monday. That new figure will include at least 20-million who lose their jobs between now and the end of 2009, said officials of the International Labor Organization.
The Cabinet set conditions for banks that accept help from a $675-billion government bailout, capping annual salary at $675,000 for top managers and requiring them to forego bonuses. Several banks and insurers said they wouldn't seek government assistance, although public-sector wholesale bank BayernLB made clear it would seek money.
Growth decelerated sharply and unexpectedly in the third quarter to 9 percent, raising fears that the global financial crisis could pull one of the world's fastest-growing economies into a recession. Economists had expected China's exports to be affected by the slowdown in the United States and Europe, but the extent to which other parts of its economy had deteriorated - such as industrial production, government revenue and imports - was a shock. "China's growth miracle has finally ended," said Sherman Chan, an analyst at Moody's Economy.com.