Democrats Set to Take On Stimulus Bill as Price Rises (Update1)

By Brian Faler

Nov. 4 (Bloomberg) -- Democrats have been pushing for months a second economic stimulus package worth at least $100 billion. Now that will only be a down payment.

Lawmakers are facing growing calls from a measure that would dwarf the $168 billion economic stimulus package signed into law in February and the $175 billion measure Democratic presidential candidate Barack Obama has called for. Economists, including Martin Feldstein and Nouriel Roubini, say the economy is in such dire shape that the plan may have to be much bigger, starting at about double the 2007 federal budget deficit of $161.5 billion.

The debate may begin in earnest when Congress returns after today's election. Should President George W. Bush not sign on to a new stimulus measure, the next Congress can work with the new president in January. Lawmakers may also opt for a piecemeal approach, passing one portion this year and the rest in 2009.

Larry Hatheway, the chief economist at UBS AG in London who is calling for a package worth as much as $400 billion, said ``in the absence of stimulus from the government, the recession will be both deeper and longer.''

Reports yesterday showed fresh signs the economy is deteriorating. Manufacturing shrank in October at the fastest pace in 26 years, according to the Institute for Supply Management, while the Federal Reserve said that banks were making it tougher for businesses to get loans. General Motors Corp. said that last month, when adjusted for population growth, was the auto industry's worst since World War II.

Feldstein's Suggestion

That's leading economists from across the political spectrum to call for ever-larger fiscal stimulus measures. Harvard University Economist Feldstein, a former Reagan administration official, said last week that $100 billion isn't enough. He suggested spending as much as $300 billion in an op-ed published in the Washington Post.

Roubini, a New York University economist, told Congress's Joint Economic Committee last week that the economy needed at least that much. He said lawmakers may have to spend as much as $400 billion. Former Securities and Exchange Commission Chairman Arthur Levitt, who consulted with congressional Democratic leaders, said he expects a plan ``north of $300 billion.''

Goldman Sachs Group Inc. economists upped the ante even more, saying in a Oct. 24 research note that the measure ought to be as much as $500 billion in order to offset a big slowdown in consumer and business spending. A stimulus that size would add federal spending in an amount larger than the record $454.8 billion deficit in the fiscal year which ended Sept. 30.

Wal-Mart's Stance

It's not only economists arguing for a second stimulus. Wal- Mart Stores Inc. Chief Executive Officer H. Lee Scott told analysts on Oct. 28 that a second stimulus package ``is clearly something that is needed with our customers.''

The demands may force Democrats to choose between widening the deficit to such a degree that there will be little money left for the next administration's campaign promises and allowing the economic slowdown to become even more protracted.

The proposals come at a time when the deficit is likely to top $1 trillion for the first time in history -- and many budget watchers wonder where the next president will find the money to pay for his campaign promises. House Speaker Nancy Pelosi, a California Democrat, dismissed calls for bigger stimulus package, saying they are unaffordable.

`Can't Afford That'

``Many of the economists tell us we need a $300 billion'' plan, she said last week in an interview with the San Francisco radio station KGO. ``We just can't afford that,'' she said, saying ``we're talking more in the hundred billion dollar range.''

Pelosi said lawmakers could revisit the issue later if the economy is still slow. ``Let's just take it one step at a time,'' she said.

Pelosi also reported progress in negotiations with the Bush administration, which had been cool to Democrats' calls for additional stimulus. She said she spoke with Bush and ``we agreed to strive to find bipartisan agreement on the economic stimulus package.''

White House spokesman Tony Fratto said the administration is waiting to see what lawmakers propose when they return to Washington later this month for their ``lame-duck'' session.

Blocked in Senate

Plans for more stimulus appeared to be all but dead just two months ago when Senate Republicans blocked a $56 billion plan to expand unemployment benefits, food stamps, highway spending and other initiatives.

Democrats, trying to increase pressure on Republicans to back the plan, held a series of hearings last month, after Congress had adjourned for today's election, in order to highlight calls for additional stimulus. Federal Reserve Chairman Ben Bernanke endorsed additional stimulus in a hearing last month without saying how big he believed such a plan ought to be.

Congressional Democrats had initially floated the idea of spending $300 billion before scaling that back to around $150 billion. Obama has proposed spending $175 billion, including $25 billion for school repairs, roads and bridges, in addition to $500 checks for consumers to offset a rise in energy costs.

A protracted slowdown -- which slows the flow of tax revenues into the Treasury while driving up food stamp, Medicaid, and other public assistance costs -- could prove just as harmful to the government's budget outlook.

``A very stagnant economy is going to erode public finances every bit as much as, and probably more so, than a shot in the arm today,'' said Hatheway. Even a big stimulus plan, he said, ``may be prove to be cheaper.''

To contact the reporter on this story: Brian Faler in Washington at bfaler@bloomberg.net .

Last Updated: November 4, 2008 11:16 EST

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