Economic Stimulus Gains Traction

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Bernanke Gives Nod to More Government Stimulus

Federal Reserve Chairman Ben Bernanke told Congress Monday a fresh round of government stimulus is a good idea because there's a risk the country's economic weakness could last for some time.

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Many Republicans argue that money for such projects would be spent too slowly to spur short-term economic growth, a concern shared by some liberal economists. Republicans also argue that aid to the states would reward irresponsible spending by some legislatures. In January, the nonpartisan Congressional Budget Office concluded that neither strategy is a very effective way to stimulate the economy.

Thousands of road and other projects have been postponed because of the skyrocketing cost of construction materials and, more recently, the rising cost of borrowing money. Steve Sandherr, head of the Associated General Contractors of America, said his group and others have identified more than 3,000 road and other projects that could put people to work immediately with an injection of nearly $30 billion.

"All the regulatory compliances have taken place," Sandherr said. "They're just sitting on a shelf waiting for the state to put them out to bid."

Similarly, because state governments are required to balance their budgets each year, budget shortfalls in state capitals prompt tax increases or spending cuts, both of which can dampen economic activity. With 36 states under fiscal stress, the federal government could preserve jobs by sending as much as $50 billion to the states, said Iris J. Lav, deputy director of the Center on Budget and Policy Priorities.

Although House Democrats are contemplating another general tax rebate, similar to the one approved in February, the idea has not generated much enthusiasm. "People need jobs more than they need checks," said Jared Bernstein, an economist at the Economic Policy Institute who is advising House Democrats.

Bernanke's tentative endorsement could put further pressure on the White House to come around, as it did last winter. When appointed Fed chairman, Bernanke indicated he did not want to meddle in decisions over taxes and spending, which he views as the prerogatives of elected officials. But several times now he has thrown his support behind legislative efforts to pump federal dollars into the troubled U.S. economy, including the government stimulus package passed in February and the $700 billion financial system rescue that became law earlier this month.

The reason for his turnabout: The normal tools that the Fed uses to stimulate the economy, particularly interest rate cuts, are not having their intended impact given the problems facing banks and other financial institutions. Bernanke has concluded that government spending would help.

But he hardly offered unconditional support. He said that any plan should be structured so that the benefits are felt during the period in which the economy is likely to be weak -- meaning, in the coming months. And he urged a plan that maximizes the ripple effects of spending on overall economic growth. Bernanke did not spell out details, but many independent economists say spending that goes to low-income Americans is likely to spread most rapidly through the economy, as they are less likely to save the money.

Bernanke also suggested that Congress try to find ways to ensure that a stimulus package make it easier for Americans to get credit. For example, he said, Congress could offer to pay fees charged by Fannie Mae and Freddie Mac, effectively reducing mortgage rates. Or it could offer tax credits to encourage lending, or even direct lending by the government.

Congress "should consider including measures to help improve access to credit by consumers, home buyers, businesses and other borrowers," Bernanke said. "Such actions might be particularly effective at promoting economic growth and job creation."