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Democrats' Stimulus Plan May Reach $700 Billion
It may not, however, include one of Obama's central promises: to repeal Bush's tax cuts for families earning more than $250,000 a year. Speaking on ABC's "This Week," David Axelrod, Obama's chief political strategist, said the president-elect is weighing whether to let the cuts for the wealthy expire on Dec. 31, 2010, as provided in current law. Such a delay would permit Obama to avoid raising taxes during a recession.
"He's committed to getting middle-class tax relief in the pipeline quickly, and there's no doubt that we're going to have to make some hard decisions in order to pay for the things we need, whether it is through repeal of those tax cuts for the very wealthiest or whether we simply allow it to -- allow those cuts to expire in 2010," Axelrod said.
The projected cost of an economic stimulus package has been rising steadily as economic conditions have worsened. Economists who were calling a few months ago for $150 billion in government spending to offset flagging demand elsewhere in the economy are now pushing for $500 billion or more. Adding tax cuts to the package is expected to increase its cost to the Treasury by as much as $200 billion, Democrats said.
Even some conservative economists have endorsed the larger numbers.
Harvard economist Martin Feldstein, the former director of the National Bureau of Economic Research and an adviser to Sen. John McCain's (R-Ariz.) presidential campaign, said he thinks the government should spend "a minimum of $300 billion a year for at least the next two years."
"The cumulative multi-year deficit would have to be about $700 billion or even more," Feldstein said in an e-mail yesterday.
Reich, speaking on CNN's "Late Edition," said the middle class is being squeezed by mountains of personal debt, plummeting home values and a vast tightening in available credit. As a result, he said, "there's not enough buying power in the economy," forcing the government to step in as "the spender of last resort."
In an interview, Schumer said the nation is on the brink of the same kind of deflationary spiral that pushed down prices, closed businesses and obliterated jobs during the Great Depression.
"The economy is in worse shape than people think," Schumer said. "The safest thing is to do anything you can to avoid deflation."
Even House Speaker Nancy Pelosi (D-Calif.), whose aides have in recent weeks balked at suggestions that Democrats might spend as much as $300 billion, conceded yesterday on "Face the Nation" that the price of a stimulus package is likely to be "in the several hundred billion dollar category."
There are downsides to such a dramatic increase in government spending, especially at a time when the annual federal budget deficit already is spiraling toward $1 trillion -- about 7 percent of the gross domestic product -- a level not seen since the end of World War II. Increasing the deficit means increasing the national debt, which eventually will have to be repaid, with interest, to largely foreign creditors. It also means the nation will be even less prepared to cover the skyrocketing costs of Medicare and Social Security as the baby boomer generation retires.
Washington also could overshoot its target, sparking rampant inflation when the economy recovers. Or the money could be poorly directed and fail to efficiently stimulate the economy.
"The 1930s recession became the Great Depression because policymakers didn't take the necessary actions. Nobody wants to make that mistake this time around," said Jared Bernstein, a senior economist at the Economic Policy Institute who has been advising Democrats. "Is there a possibility that we could overshoot? Of course. But from what I've seen, the danger is not doing enough."