Friday, February 29, 2008

Stimulus package seen worth the extra red ink

by Martin Crutsinger
Associated Press

St. Paul Pioneer Press
Tuesday January 29, 2008 Pg 3C

A proposed economic stimulus plan could boost this year's deficit by $100 billion, but political leaders believe the flood of red ink is worth the cost if it keeps the country from falling into a prolonged recession.

Worries that any recession could be a severe one, far surpassing the last two mild, brief downturns in 1990-91 and 2001, have captured the attention of President Bush and other politicans, especially with the White House up for grabs.

Bush and House leaders reached a deal in record time lsat week that would provide $150 billion in economic stimulus through tax rebates that will go to 117 million families, and temporary tax breaks for businesses.

The House is rushing the proposal to a vote this week and Senate Majority Leader Harry Reid, D-Nev., said he hopes to have the package approved by the senate and on the president's desk by Feb. 15.

Concerns have mounted with a cascade of bad news on the economy, from multibillion-dollar losses at some of the nation's biggest banks and investment houses to soaring mortgage defaults and a continued plunge in housing.

The rescue effort will not be without its own cost. Economists estimated the deficit for this year will be between $100 billion and $120 billion higher because of the stimulus package, primarily from the cost of the tax refund checks. Business tax breaks will reduce government revenue by a smaller amount this year; other costs from the business relief will take effect next year.

Economists at Global Insight, a private forecasting firm in Lexington, Mass., are projecting that this year's deficit, with the stimulus package included, will hit $400 billion. That would be the second highest imbalance on record in dollar terms, surpassed only by the all-time high of $413 billion in 2004.

Even without the stimulus package, the Congressional Budget Office is forecasting the deficit for 2008 will jump to $219 billion, up from last year's $163 billion. And CBO said its new estimate did not include still unapproved outlays for the wars in Iraq and Afghanistan, which probably will push the deficit to around $250 billion.

Adding a stimulus package will make that imbalance go even higher, but was seen by many economists as critical insurance against a severe downturn.

"Doing nothing and running the risk that the economy will slide away into a deep recession would cost the Treasury even more in lost tax revenues and increased spending," said Mark Zandi, chief economist at Moody's

Zandi said he believed the stimulus package that House negotiators have approved will be enough to boost economic growth by 1.5 percentage points in the second half of this year and by about 0.5 percentage point in the first half of 2009. That should translate into an additional 700,000 jobs over what the economy would have created during that period, Zandi said. The unemployment rate will still rise from teh current 5 percent to around 6 percent, but not the 6.5 percent it would hit without the stimulus package, Zandi said.

Other analysts are forecasting a boost in growth and jobs from the package, because of increased consumer spending - which accounts for two-thirds of the economy - and increased business investment to expand and modernize in response to the tax incentives.

Douglas Elmendorf, a senior fellow at the Brookings Institution and formerly an economist at the Federal Reserve, said he believed economic growth this year will be about 0.7 percentage point higher than it would be without the stimulus, although he said that may not be enough to keep the country out of a recession.

While this is the first stimulus package being put forward, it may not be the last if the slowdown becomes more severe.

"You can construct some very dark scenarios given all the uncertainty that exists over just how big the problems in the financial system might turn out to be," Zandi said.

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