By Michael Abramowitz and Neil Irwin
Washington Post Staff Writers
Friday, December 21, 2007
The White House is betting that the steps it has taken to address the housing and financial crises will be enough to avert a recession without resorting to a major tax cut or new spending, as leading economists in both parties have urged, senior administration officials said.
In a news conference yesterday, President Bush said he is considering various measures to stimulate the economy but made clear his belief that it is not time to pull the trigger. "My view of the economy is that the fundamentals are strong, that we've had strong growth for a reason: that we're competitive, we got flexible workplace, that we kept taxes low, exports are up," Bush said.
Bush's comments reflect a consensus among his economic advisers that it is still possible to avoid a recession and that their efforts should focus on executing the programs they have already announced for containing problems in the mortgage markets -- such as the plan to freeze interest rates on certain subprime mortgages or an initiative to pay for mortgage counselors who would advise people at risk of losing their homes.
The White House is more sanguine than several of the nation's most prominent economists, who have been urging the federal government in recent days to adopt a much more vigorous fiscal policy to head off the possibility of a damaging long-term recession.
Martin S. Feldstein, a Harvard economist who was an adviser to President Ronald Reagan, has said that he thinks there is a 50 percent chance of a recession next year and that Congress should pass a tax cut that would depend on how much the economy slows. Lawrence H. Summers, who was Treasury secretary in President Bill Clinton's administration, called this week for a temporary tax cut, longer-lasting unemployment insurance benefits and additional money for food stamps. Former Federal Reserve chairman Alan Greenspan has said that he thinks the considerable risk of a recession warrants making emergency aid available to homeowners at risk.
But in an interview this week, Bush's outgoing economic policy adviser, Allan Hubbard, said the White House does not see the need for such measures at the moment. "We just don't see any reason why the economy won't continue to expand," he said.
Senior administration officials acknowledged that they are beginning to explore elements of a stimulus package, possibly to be unveiled close to next month's State of the Union address, but they declined to offer details. What the president decides to do will depend heavily on new economic indicators over the next month, according to aides, who said they hope those indicators will clarify how serious the storm clouds are for the economy.
Independent economists say the modest proposals floated by the administration are unlikely to make much of a difference in whether the country will experience a recession next year. A recession is a significant decline in economic activity that lasts more than a few months, affecting incomes, employment and other benchmarks.
"What's coming out of Washington is not really large enough to have a macro impact," said Brian A. Bethune, a U.S. economist at consulting firm Global Insight. "They're kind of dancing around the edges of this thing."
The cautious approach carries risks for the White House. Business economists surveyed by the publication Blue Chip Economic Indicators expect the U.S. economy to grow by a modest 1.7 percent next year, consistent with the president's view that the economy will weather the crisis. If Bush is right, then a stimulus package would needlessly increase the budget deficit. But if he is wrong and there is a serious downturn, the failure to act could further weaken an already unpopular president in his final year.
The darkening economy could also open up a new line of attack for Democrats on the presidential campaign trail, where it has not, so far, figured as a major issue in either party's nomination fight.
Strategists in both parties think that situation is likely to change in the coming months: A Washington Post-ABC News poll this month showed that the economy has become a much more critical election issue over the past three months, alongside the war in Iraq, and that 34 percent of respondents approve of Bush's handling of the economy, the lowest marks he has ever received on the issue.
Rep. Rahm Emanuel (Ill.), a top House Democrat, is pushing his party to make the economy more of an issue in the coming months. He said Bush has adopted a complacent approach, as did his father, President George H.W. Bush. "You have got a major financial crisis. You have got a major mortgage and home-value crisis. You have rising energy and health-care costs. And, for the first time since the Depression, a negative savings rate," Emmanuel noted. "Outside of that, [Bush] wants to tell you everything is okay."
But the president has been careful to voice empathy for the average worker. "I'm concerned about the fact that Americans see their costs going up," Bush said yesterday. "I know Americans are concerned about whether or not their neighbor may stay in their house. And so we're dealing with these issues."
Bush allies on the Hill appear to be standing behind the president on this issue. "This economy looks considerably better than what he was dealing with at the outset" of the administration, said Rep. Tom Cole (Okla.), chairman of the National Republican Congressional Committee. "I would still argue that it is still a Republican strength. There is really no Democratic answer except higher taxes and protectionism, and it's hard to sell that."
The Bush administration's approach to the mortgage crisis has been a patchwork of proposals that offer no "silver bullet," in the words of Treasury Secretary Henry M. Paulson Jr., who has emerged as the administration's point person on the economy. Foreclosure rates rose rapidly throughout 2007, but, as recently as July, Paulson described the problems in the housing market as "largely contained."
It was not until Aug. 31, after the problems had worsened and while financial markets were in full crisis mode, that the president announced policies meant to alleviate the crunch. The ideas he proposed then -- making a federal loan insurance program better able to help borrowers refinance into affordable mortgages, and changing a tax law that made it hard for people to renegotiate with their lenders -- were widely embraced.
Congress passed the tax change this week. But the proposed changes for the Federal Housing Administration have stalled on Capitol Hill. Differing versions of the bill have been passed overwhelmingly by the House and the Senate, but the two chambers have not been able to reconcile the differences.
Democrats in Congress have sharply criticized the administration for responding too timidly, but their policy disagreements are more subtle than the heated rhetoric would suggest.
In a speech this week, Sen. Charles E. Schumer (D-N.Y.) said the administration "cannot step up to the plate to solve major problems." But of the seven policies he has proposed, the administration is in general agreement -- though with differences on many details -- with six.
For example, Schumer advocated increasing the size of the loans that government-sponsored finance companies Fannie Mae and Freddie Mac can fund. Paulson has said that he would support such a move, as long as it includes a stronger regulator for the companies.
Rep. Thomas M. Davis III (R-Va.), who has been supportive of Bush's handling of the economy, said it is difficult to design the right approach to an uncertain economic situation. Of the White House, he said: "They are nervous that we will do more than we need to do. In a month, we will get more data. The real question on the subprime crisis is 'How deep does it reach?' "
Polling director Jon Cohen contributed to this report.