Fed Chairman Backs Stimulus

By Neil Irwin and Jonathan Weisman
Washington Post Staff Writers
Friday, January 18, 2008

Federal Reserve Chairman Ben S. Bernanke endorsed government efforts to stimulate the economy yesterday, as congressional leaders and the Bush administration moved closer to agreement on a plan.

President Bush plans to lay out the principles behind his preferred stimulus today, although he will not provide details. The leading ideas in the administration are to give rebates of up to $800 to each taxpayer and introduce tax incentives for business investment, but administration officials said no decision has been made on exactly what to do to try to prevent a recession.

House Speaker Nancy Pelosi (D-Calif.) said Congress will have a package ready for action by Jan. 28, when Bush delivers his State of the Union address. House Republicans backed away from their demand that Bush's tax cuts be made permanent, which would have been a deal-killer for Democrats. Some tension between the administration and congressional leaders remained, though, as Senate Majority Leader Harry Reid (D-Nev.) sharply criticized Bush for talking about his stimulus plans prematurely.

While consensus was forming in Washington, yesterday was another painful day on Wall Street. The Dow Jones industrial average fell 306.95 points, or 2.5 percent, as Merrill Lynch reported a huge quarterly loss and a report indicated that U.S. housing starts fell 14.2 percent from November to December.

Bernanke, in testimony to the House Budget Committee, seemed to repudiate those in Congress who seek to use economic stimulus to put in place policies that would affect the economy over the longer term -- permanent tax cuts, for example, or big infrastructure projects. Bernanke explicitly and repeatedly urged Congress not to conflate policy changes that might make sense in the long run with those that would provide immediate help for the economy.

"Fiscal stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving," Bernanke said. He added later, "I think in order for this to be effective you need to move very quickly."

Bernanke has been reluctant to take on the role his predecessor, Alan Greenspan, played as the nation's economist-in-chief. Greenspan often told Congress of his economic policy preferences, but Bernanke yesterday repeatedly declined to take positions on what tax and spending levels are appropriate. ("Does Congress spend to much?" asked Rep. J. Gresham Barrett (R-S.C.). "That's not my call," Bernanke said.)

The Fed chairman did state some principles for what kinds of policies would do the most to keep the economy from slowing too drastically in 2008. He called the stimulus packages being considered, $50 billion to $150 billion, "reasonable." And he indicated that money provided to low- and moderate-income Americans is likely to result in more new economic activity than funds that go to people with high incomes.

Congressional leaders appeared to heed the advice about separating long-term economic policy from short-term stimulus. Pelosi emphasized, after a conference call with Bush, that Congress and the administration were working on a proposal that will be "timely, targeted, and temporary," which is consistent with what Bernanke advised in his testimony.

"We'd rather keep this as plain vanilla as we can," Budget Committee Chairman John M. Spratt Jr. (D-S.C.) told reporters.

Republican leaders, meanwhile, indicated that they could go along with a stimulus plan that does not include a permanent extension of Bush's first-term tax cuts, which are to expire in 2011.

"They've drawn a line in the sand on the Bush tax-cut extension, so we've seen a shift," said Rep. Eric Cantor (Va.), the Republicans' chief deputy whip. "There's been a realization that we need to get something done, and the expectations are not that high that we will get that done."

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