By Lori Montgomery and Dan Eggen
Washington Post Staff Writers
Saturday, October 18, 2008
Congressional leaders and both presidential candidates are proposing billions of dollars in tax breaks and other measures to stoke economic growth, a surge in spending that could send the federal deficit soaring toward $1 trillion this year, creating the deepest well of red ink since the end of World War II.
The government already has embarked on an unprecedented spending spree to halt the implosion of the U.S. financial system and is borrowing money at levels that some economists fear could undermine the nation's economic security for years to come. Congress could consider additional spending as soon as next month, potentially digging the nation's hole even deeper.
"We're going to make Ronald Reagan look like a piker in terms of deficit creation, I think," said Rudolph Penner, a senior fellow at the Urban Institute who served as director of the Congressional Budget Office during the Reagan administration.
The numbers are adding up fast. Since President Bush signed an economic stimulus package in February, authorizing billions of dollars in rebates for American taxpayers, the government has pledged as much as $1.5 trillion to prop up the teetering economy. It has approved new mortgages for struggling homeowners, salvage operations for faltering financial institutions and a historic $700 billion bailout plan to pump money into banks paralyzed by the financial crisis.
The Treasury Department so far has borrowed nearly $500 billion from pension plans, foreign governments and other investors to replenish the coffers of the Federal Reserve. Since the end of August, the national debt has jumped from $9.6 trillion to $10.3 trillion, with borrowing for the bank bailout yet to come.
Meanwhile, the budget deficit -- the annual difference between government spending and tax collections -- has risen rapidly. It jumped from $162 billion last year to $455 billion in the fiscal year that ended in September, largely because of the cost of the stimulus package, as well as slowing tax revenues and rising expenses in Iraq and Afghanistan.
The budget picture looking forward is even bleaker. While the deficit is projected to be about $550 billion for the fiscal year that began Oct. 1, budget analysts have yet to figure in the effects of a recession, which could easily tack on another $100 billion. They also have not included the first $250 billion being spent on the bailout plan, which the White House budget office said this week must be added, even though much if not all of the money is eventually expected to be returned to the Treasury.
And with options for a second round of stimulus spending starting at $52 billion -- the size of the package proposed earlier this week by Republican presidential candidate John McCain -- it's not hard to imagine the deficit rising to $1 trillion. That would approach 7 percent of the economy, a yawning budget hole not seen since 1946.
Some economists say that prospect should dampen talk of further spending. Others say it's better to spend the money now in an effort to protect jobs and smooth over the harshest effects of a recession than to lose the money later through sharply lower tax collections and higher unemployment payments. Economists advising House Democrats are urging a spending package of as much as $300 billion, arguing that the economy could shrink by about that much over the next year.
"The rationale is that the economy is in recession and a lot more people are going to lose their jobs and we can prevent some of that -- not all of it, but some of it -- by raising government spending and cutting taxes. And that's worth doing," said Douglas Elmendorf, a former Federal Reserve economist now at the Brookings Institution, who argues for as much as $150 billion in stimulus spending.
For months, Democrats have been calling somewhat halfheartedly for additional spending to assist the unemployed and other struggling consumers. The House passed a second stimulus measure last month, but the $61 billion package drew a veto threat from the White House and died in the Senate. Calls to revive the measure grew more insistent after Congress approved the $700 billion bailout, prompting Democrats to argue that if the government could afford so much money for Wall Street it could afford to direct some to Main Street, too.
With the Nov. 4 election less than three weeks away, stimulus plans are proliferating like Halloween pumpkins.
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."