Spending Surge Pushing Deficit Toward $1 Trillion

McCain this week unveiled his $52 billion package, which includes tax breaks for Americans withdrawing money from retirement accounts, the elimination of taxes on unemployment benefits, and a cut in capital-gains taxes for investors who sell long-held stocks. McCain also proposed using nearly half of the money from the $700 billion bailout to buy mortgages held by distressed homeowners, renegotiate their debt and help them stay in their homes.

Democratic presidential candidate Barack Obama had initially proposed directing billions of dollars to road projects, aid to state governments struggling with budget shortfalls and a broad tax rebate worth $500 to individuals and $1,000 to families. This week, he tacked on a temporary tax credit for companies that hire workers in the United States, raising the price of his plan to $175 billion.

The spending proposals come on top of promises by both candidates to dramatically cut taxes. In addition, Obama has pledged to pursue expensive new initiatives to expand health care coverage and improve education. The candidates' top economic advisers, Jason Furman of the Obama campaign and Douglas Holtz-Eakin for McCain, said they have no plans to reconsider those promises in light of the new economic realities.

In the final presidential debate on Wednesday, McCain even repeated his pledge to balance the budget by the end of his first term, though Holtz-Eakin acknowledged that "the events of the past few weeks have made that considerably more difficult."

On Capitol Hill, House Speaker Nancy Pelosi (D-Calif.) had been calling for $150 billion in new spending until a summit this week with Elmendorf and other economists. On Thursday, Pelosi told interviewer Charlie Rose that her "economic recovery" package could grow to "a couple hundred billion dollars" and would include many of the same measures Obama has proposed, as well as an extension of unemployment insurance and an increase in spending on food stamps.

House Minority Leader John A. Boehner (R-Ohio) jumped aboard the stimulus bandwagon this week, issuing a proposal that included many of McCain's ideas. Aides said a cost estimate for the GOP plan was not available.

The White House has reacted coolly to talk of a second stimulus package, though there are signs that its opposition is softening. White House press secretary Dana Perino this week left the door open to further stimulus, though she emphasized that the president remains leery of calls for new spending on roads and infrastructure, arguing that such projects generally take too long to have an immediate economic impact.

"To us, that doesn't sound like the stimulus we need," said Steve McMillin, deputy director of the White House budget office. "We don't rule out anything forever. But what they're talking about is not something we think is going to be helpful for the economy and is something that will create further pressure and risk for our budget situation."

Vincent Reinhart, the former chief monetary economist at the Fed and a resident scholar at the American Enterprise Institute, said that, in principle, "a targeted, timely stimulus package that could be put in place quickly" would make sense for the economy right now. The danger, he said, is a political environment that has both raised the desire for government action and expectations about what it can accomplish.

With the financial bailout plan, "we have a new high watermark as to how much the government should do. And that's a very high watermark," Reinhart said. "The chances we overdo [stimulus] are pretty high."