The next administration and Congress should consider a massive stimulus package or federal financial assistance to help states manage debt to help recover from the credit crunch, a number of leading economists and former government budget experts said here yesterday.
Speaking at a meeting on the financial crisis hosted by the nonpartisan Committee for a Responsible Federal Budget, many panelists said an economic stimulus package of up to $300 billion to $400 billion, possibly with infrastructure spending, could help in the short term. But others said it may be counterproductive and unlikely to be enacted.
"This President is going to need a stimulus package," said Alice Rivlin, founding director of the Congressional Budget Office and senior fellow of economic studies at the Brookings Institution.
But Leon Panetta, the former chairman of the House Budget Committee who served as both director of the Office of Management and Budget and White House chief of staff during the Clinton administration, questioned the need for such a package and warned that Congress probably would not be able to approve it in a lame duck session next month. "A stimulus plan satisfies a political need, not an economic need," he said. "It's always this need to look like you're doing something."
"I think we'll get a stimulus package" as early as next month, said Tim Adams, managing director of the Lindsey Group and the former Treasury Department undersecretary of international affairs. But even so, investors may hesitate to put capital into the U.S. market under expected new regulations for the financial markets, which will seem like, "Sarbanes-Oxley on steroids," he said.
A stimulus package "could include aid to states," Rivlin said. The package may be a "reason for improving our infrastructure, which everyone wants to do anyway," she added.
"A stimulus package is sort of what we know how to do" in terms of investing in the economy, said Martin Baily, who chaired the Council of Economic Advisers during the Clinton administration and currently is an economic adviser to the Congressional Budget Office. "I do worry about the long-term fiscal implications" of giving out more money under the umbrella of a stimulus package, he said, adding, however, that he would support having another stimulus package "ready to go." He predicted the economy "will remain sluggish" even if the "optimistic view" that the gross domestic product will bounce back after the fourth quarter holds true.
Baily said that there is a 40% probability that the recession will deepen, and that if the bailout package does not work, we will "almost certainly" experience a deeper recession.
Dean Baker, co-director of the Center for Economic and Policy Research, said a second Great Depression will not occur, although he predicted an additional $3 trillion to $4 trillion loss in housing equity will transform future consumer spending into saving and put a "drag on the economy." He proposed a "modest financial transaction tax" similar to the 0.25% tax on stock sales and purchases in the United Kingdom.
Panelists and others said they expect states to come to the federal government for help in the near future.
"States are going to come in and ask for additional loans ... or bailouts of one kind or another," Panetta said. "That door is now open and you're going to see a lot more people trying to come through."
Baily said the federal government may need to give states financial assistance but should not "reward the states that have the biggest budget woes."
In a brief interview following the panel, Baker said he expects "some support for state debt" from the federal government. The question is whether that would come from the Federal Reserve or the Treasury, he said.
"The really important question from a policy standpoint is, 'Is the federal government going to help states balance their budgets so that the need for tax increases or spending cuts come November, December, January, is not so great?'" said Nick Johnson, director of state budget and tax system reform at the Center on Budget and Policy Priorities. Johnson did not participate in the panels but issued a report Tuesday arguing for some form of federal aid for states.
To balance their budgets, states "typically must cut spending or raise revenue, either of which can exacerbate a recession by reducing aggregate demand in the economy," the report said. "Because state spending cuts or revenue increases are likely to worsen the economic downturn, many economists, including those at the Congressional Budget Office and others, have argued for a program of increased federal assistance to states."
In the recession following the Sept. 11 terrorist attacks, the federal government provided $20 billion of fiscal relief in the form of increased Medicaid match and general grants to states, which averted deeper cuts in public health insurance than actually occurred and helped prevent cuts in a wide variety of other critical services.
"Congress should move as quickly as possible to consider a similar package," Johnson said in the report.
Lynne Funk contributed to this article.