The Bush administration threw its support behind an economic-stimulus package to help consumers and businesses cope with the slowing economy, though its ultimate success will hinge on its size and structure. Democrats had been pushing for a second such plan to pump funds into the real economy, though a $61 billion economic aid plan was blocked by Senate Republicans last month, and President Bush had already threatened a veto. The tone changed markedly on Monday, as Federal Reserve Chairman Ben Bernanke told the House budget committee that a stimulus package would be "appropriate" to deal with the headwinds facing consumers and businesses. While he refused to offer advice on the dollar amount, Bernanke said the package should be "significant." White House press secretary Dana Perino said later in the day that President Bush is "open to ideas that
Congress would put forward ... that would stimulate the economy and help us pull out of this downturn faster," according to the Associated Press. House Speaker Nancy Pelosi (D-Calif.) has said that Congress will hold hearings next month to determine the exact size of the plan, but suggested that funds could potentially go toward infrastructure, states that have seen a sharp economic decline, additional unemployment benefits and rebates or tax cuts to help support consumer spending. Bernanke said the funds ought to be "well-targeted," in areas that will push forward a so-called knowledge-based economy. He mentioned education, research and development, technology, energy and science as potential areas, as well as basic infrastructure, in which the Roosevelt administration invested heavily to bring the country out of the Great Depression. The government has distributed $168 billion worth of direct-to-consumer stimulus payments this year, though it has been deemed a failure in its effort to spur spending. Only between 10% and 20% of the rebates were actually spent, as wary shoppers hoarded most of the cash or spent it on essential items, as food and energy prices skyrocketed over the summer. Martin Feldstein, a leading economist at Harvard who first supported the package, said that "optimism was unwarranted" in a Wall Street Journal opinion piece whose headline called the earlier program a "flop." "I still believe that the evidence shows that a one-time rebate-type package is not effective," says Feldstein. "Whether some spending program will have a 'real impact' will depend on how big the package is."
While Bernanke's suggestions to invest in innovation and "human capital" would be a wise long-term investment, the immediate impact is less clear. Investments in infrastructure may help employment "at the margin," says Robert MacIntosh, chief economist with Eaton Vance, by adding some high-paying jobs. And while such projects take time to develop and plan, several major jobs for roads, bridges, buildings and water supplies have been mapped out and simply await financing, says Stephen Figlewski, a finance professor at New York University's Stern School of Business. "Those things are all terrific, but the real question is, 'Okay, how do we make a clear distinction between the short-run and the long-run?'" says Figlewski. " It's a stimulus package, and that's not money that's going to get us going right now." G. Andrew Karolyi, a professor of finance at Ohio State University, agreed, saying it's "too long of a gestation period for such a plan to take effect" when legislators are looking for "a short-term spark to limit negative growth or look for positive growth." Bernanke also suggested that Congress focus on improving access to credit for consumers, homebuyers and businesses, perhaps by providing direct loans or otherwise supporting a lending program. While the government has taken measures to help the financial system, including by lowering a key interest rate target, easing lending standards and structuring a program to inject $250 billion in capital into cash-starved banks. Banks taking part in the program reportedly include Goldman Sachs ( GS), Morgan Stanley ( MS), JPMorgan Chase ( JPM), Bank of America ( BAC), Merrill Lynch ( MER) Citigroup ( C), Wells Fargo ( WFC), Bank of New York Mellon ( BK) and State Street ( STT).
MacIntosh notes that there were no provisions to force those banks to lend out the funds to consumers, which might mean that banks simply store the cash for sunnier days. While he is not especially supportive of direct lending from the government, he says it's crucial for the feds to inject more liquidity into the system on a retail level, as well. Even the most prime borrowers are having trouble getting access to credit, he notes. "It's turning into a slippery slope of the government becoming a last-resort money window," says MacIntosh. "I really don't want to see that happen, but they have to do something to get to the heart of Mr. and Mrs. Smith getting a mortgage or home-equity loan that they just can't get right now." Bernanke said if tough credit conditions continue, it could worsen the economic decline. He added that improving access to credit could be "particularly effective" to promote economic growth and job creation. Another looming question concerns how much debt the U.S. government is willing to take on, which adds to the federal deficit. Figlewski says strong demand for Treasury bills and the seriousness of the financial crisis make the deficit a secondary concern. "People are scared to hold risky securities. There's a great demand to hold safe securities," he says. "I wouldn't worry too much that we're going out there and borrowing a lot because that's what people want to own. People want to own T-bonds." Karolyi agrees that the fear of a "deep, prolonged recession" that has been predicted outweighs concerns about tacking on debt, but stresses that the consequences could be painful. The competition for Treasury notes could make money more expensive for everyone, unless authorities "inflate it away" by ramping up the money supply. Still, says Karolyi, something has to be done to get the system moving again. "GDP is a function of consumption, investment and government spending. If you haven't got 'C' and 'I' you've got 'G.'"