By Lori Montgomery
Washington Post Staff Writer
Thursday, November 6, 2008
When President-elect Barack Obama moves into the White House in January, he will inherit a stratospheric budget deficit, a collapsing financial system and the gloomiest economic outlook since the Great Depression. The silver lining? For a few months, at least, he may have a license to spend money.
Make that lots and lots of money. With the nation sliding into what is expected to be a severe recession, economists are calling on the federal government to pump at least $150 billion -- and as much as $500 billion -- into the economy to blunt the most painful effects of rising joblessness and stalled consumer spending.
Even at the low end, that's about what the nation spent last year on the Iraq war. To cover the cost of stimulating the economy, there's a broad consensus among lawmakers that the government should simply borrow more money. That means Obama would have a one-time free pass to fulfill any number of expensive campaign promises, without opposition from budget watchdogs who ordinarily would demand tax hikes or spending cuts to pay for the new programs.
"You can do your energy plan. You can do a massive infrastructure investment that includes rebuilding schools and repairing schools. You can do public housing that helps poor people and gets the construction guys going," said Robert Borosage, president of the liberal Institute for America's Future. "There are a whole range of things that are progressive that liberals want that can come under this shelter" of stimulating the economy.
On the downside, stimulus spending will further bloat a budget deficit that already is spiraling toward a record $1 trillion in the fiscal year that began last month. And key lawmakers said they will demand that Obama keep his promise to restore fiscal responsibility to Washington by paying for any other new programs, including his marquee proposals, to permanently cut taxes for the middle class and to offer health-care coverage to the uninsured.
Democratic leaders "believe there's a need for stimulus. But we also need to focus very carefully on the deficit in the long term," said House Majority Leader Steny H. Hoyer (D-Md.). "We feel very strongly that we've done a lot of debt incursion, a trillion dollars this year. It's probably necessary in the short term. But unless we get a handle on the long-term debt, it will do permanent harm to the country."
Obama's economic advisers said his immediate priority will be managing the Treasury Department's $700 billion bailout of the nation's financial system and winning approval of an economic stimulus package that would increase the deficit by as much as $175 billion over the next two years. But Obama has said he is committed to paying for other proposals.
So far, he has provided little information about how he would do that. An analysis by the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, found that Obama's tax proposals would increase the deficit by nearly $3 trillion over the next decade. He has until spring, when he offers a budget request that must lay out his spending plans through his first term, to come up with some answers.
Some budget analysts said he should abandon his most expensive proposals, like keeping a big chunk of the Bush tax cuts past their 2010 expiration date, a move that would cost more than $100 billion a year.
Like his GOP opponent, Sen. John McCain of Arizona, Obama "made campaign promises that didn't add up, and everybody knows they didn't add up," said Robert Bixby, executive director of the Concord Coalition, a nonprofit group that advocates deficit reduction. "He could say, 'The situation is very bad, and I can't do everything I wanted to do.' And I think everyone would then breathe a sigh of relief and say, 'Now let's get down to work.' "
But others said abandoning the tax cuts would be politically devastating.
"The middle-class tax cut was central to the campaign. We need to find a way to get it done," said Rep. Chris Van Hollen (Md.), who chairs the Democratic campaign committee for House races.
One of Obama's first big fiscal tests will be shepherding stimulus spending through Congress. Yesterday, House Speaker Nancy Pelosi (D-Calif.) raised the prospect of two or possibly three stimulus packages in the months ahead. If the Bush administration agrees to negotiate a deal, the first could be hammered out when lawmakers return to Washington on Nov. 17 for a brief session.
Hoyer and other lawmakers said they could work with Bush to put together a package worth about $100 billion. Or they could simply press the Senate to approve a $61 billion plan that passed the House last month. About half the money in that package would be dedicated to public-works projects in an effort to create jobs. The rest of the money would provide a 13-week extension of unemployment benefits, higher food-stamp allowances and aid to state governments to help pay for rising Medicaid costs.
The Bush administration has threatened to veto that package, but Democrats say a deal could be struck because the president has several last-minute agenda items he would like to see approved, including a free-trade pact with Colombia, which Democrats have opposed.
To boost the economy without unnecessarily increasing the nation's debt, economists agree, stimulus spending should be targeted, timely and, above all, temporary. That means no permanent new programs or tax cuts.
"There are those in our party that are going to want to pass new programs that they've been waiting on since 1994," when Republicans wrested control of Congress, said Rep. Mike Ross (D-Ark.), who leads a key bloc of Democratic deficit hawks whose ranks expanded in Tuesday's elections.
"We'll make sure we all make the difficult decisions that force the federal government to live within its means," Ross said, because "we see our job as helping to ensure we maintain this new Democratic majority."
Staff writer Paul Kane contributed to this report.